On a day when all attention would usually be focused on Westminster, the Square Mile had more pressing issues to deal with than Jeremy Hunt’s Budget.
“Credit Suisse has dominated everyone’s attention on the trading floor,” says one City trader. “The Budget failed to garner any attention.”
For years, Credit Suisse has been the bad apple of the European banking industry. A series of costly and cack-handed blunders had cost it billions and seen its share price slide almost continuously.
But on Wednesday, what had been a slow-burning mess exploded into an acute crisis that triggered a scramble across City trading floors.
What triggered the panic was two words: “Absolutely not”.
Credit Suisse’s share price plunged as much as 30pc after its biggest investor said it will not stump up any more cash to backstop the struggling bank. Ammar Al Khudairy, chairman of the Saudi National Bank, ruled out any further support, saying there were "many reasons" not to put any more money in.
Market sentiment was already febrile following the collapse of Silicon Valley Bank (SVB) and amid lingering concerns about Credit Suisse. Al Khudairy’s words were like a match thrown into gasoline.
Investors frantically sought to figure out how bad things were and what it meant for the wider economy. The result was wild swings in prices of everything from oil to gold and government debt.
The bank's credit default swaps, which investors buy to protect themselves from a company defaulting on their debts, surged to a new record high as speculation swirled that it could be forced into a bailout.
Banking stocks across the world fell, while the price of oil dropped to its lowest level in over a year on concerns about possible recession.
The euro slumped nearly 2pc against the dollar as traders fretted about what it could mean for the eurozone’s economy.
The price of gold spiked and the yield on US government debt dropped sharply as investors rushed to put their money into safer assets.
Nouriel Roubini, an economist known as “Dr Doom”, raised the spectre of a Credit Suisse default becoming a “Lehman moment”.
He told Bloomberg TV: “The problem is that Credit Suisse, by some standards, might be too big to fail, but also too big to be saved.”
Early on Wednesday, Credit Suisse's chairman had ruled out government support as he sought to reassure investors.
Axel Lehmann, Credit Suisse’s chairman, said the bank “already took the medicine” when it announced its radical restructuring plan late last year.
Systemic concerns
Yet as its share price tumbled, Credit Suisse reached out to the Swiss National Bank (SNB) to ask for a public show of support. Late on Wednesday night, it announced it would be borrowing up to $54 billion (£44 billion) from the central bank.
Some in the market believe more radical intervention was inevitable. The City trader said: “It doesn’t look like there’s much Credit Suisse can do from here to change the narrative themselves.
"Investors are eagerly waiting for a potential nationalisation scenario from the SNB to avoid it becoming systemic.”
While regulators in Switzerland and the UK were keeping tight-lipped on Wednesday evening, the European Central Bank (ECB) was reportedly contacting other banks to ask about their exposure to the embattled Swiss lender.
Gary Greenwood, a banking analyst at Shore Capital, said: “A failure of a bank of this size would clearly raise systemic concerns."
However, he added: "Given its woes have been known about for some time, you would hope that other banks, including those in the UK, would have been appropriately managing their counterparty risk.
“We may find out sooner rather than later whether all the new tools that have been put in place by regulators post-financial crisis to allow for an orderly failure of a large bank without causing massive contagion actually work.”
'Losses would destroy Switzerland’s reputation'
Pressure on the bank's share price eased slightly as the US woke up. Credit Suisse shares rallied in mid-afternoon and ended the day in Zurich down 25pc, having as much as 30pc in the red earlier. Shares traded in New York eased back to a loss of 14pc.
Yet the crisis is far from over. Octavio Marenzi, an analyst at Opimas, told the Financial Times: “It is looking inevitable that the SNB will have to intervene and provide a lifeline.
“The SNB and the Swiss government are fully aware that the failure of Credit Suisse or even any losses by deposit holders would destroy Switzerland’s reputation as a financial centre.”
Late on Wednesday, the SNB and regulator FINMA issued a joint statement meant to reassure investors. The pair said Credit Suisse remained well capitalised and pledged to support the bank with extra liquidity if needed.
While well short of a bailout, the statement helped Credit Suisse stock rally in the aftermarket in New York. The bank will face a further test when Zurich’s stock market opens on Thursday.
Even if the short-term emergency abates, Credit Suisse’s new management team is embarking on a complex restructuring that will see it spin out the investment bank and focus on its key wealth management business.It is a high risk strategy.
The bank has limped from crisis to crisis over the past two years, but its problems deepened this week as the economic backdrop worsened.
Amid the market fallout triggered by the collapse of Silicon Valley Bank, the Swiss lender said it had found weaknesses in its financial reporting controls and had so far failed to reverse a trend of customers pulling funds from the bank.
If Credit Suisse does run further into trouble, it would undoubtedly test the mettle of regulators both in the UK and abroad.
Hendrik du Toit, chief executive of UK asset manager Ninety One, which has a very small holding in the Swiss bank, said: “Sizeable bank failures, unless dealt with firmly, sow the seeds of contagion.
“It is too early to tell whether this will cause further damage [but] Credit Suisse needs to be dealt with.
“Expect volatility to continue.” The Bank of England declined to comment.
