Credit Suisse: When Trust Disappears

On Wednesday, Credit Suisse shares fell by around 30 percent to an all-time low. The Swiss National Bank stepped in, offering a SFr50 billion loan to stabilise the situation. After years of scandal, trust in Credit Suisse disappeared. Finance Watch believes that while it is logical that the Swiss National Bank steps in to support Credit Suisse, this raises important questions for society as it feeds moral hazard.

On 5 March, Harris Associates, one of Credit Suisse’s longest-standing shareholders, sold its entire stake in the bank. On 9 March, the systemically important bank postponed the publication of its annual report after the US Securities and Exchange Commission questioned its earlier financial statements. Following on from this, Credit Suisse announced it found “material weaknesses” in its reporting and control procedures for the past two years on 14 March. On the same day, the Chair of Saudi National Bank announced the decision not to invest further in the bank. These are but the most recent developments in the story of Credit Suisse. Following years of scandals, the decision by two well informed parties to withdraw shook the trust of general market participants with access to less information. This is a case of information asymmetry: if the well informed leave, why should I stay?

Yesterday, the Swiss National Bank injected SFr50 billion into Credit Suisse, a systemically important bank with total assets of SFr755.8 billion, to provide liquidity. The first thing the bank did with this loan was to buy back approximately SFr3bn of bonds it had issued. This comes down to bailing-out private creditors with public money. Finance Watch, the pan-European NGO advocating to make finance serve society, recognises that the objective was to reassure financial markets, and the stock price of Credit Suisse did recover much of the ground lost the previous day. From the standpoint of the Swiss National Bank, this stopped the pro-cyclical negative spiral that could have had very severe consequences for Credit Suisse. However, from a public interest standpoint, Finance Watch argues that this feeds moral hazard, a situation in which profits are privatised and losses socialised, and capital allocated to banking institutions with no regard for the quality of their business and their risk management. This situation is harmful from an economic and societal perspective.

Thierry Philipponnat, Chief Economist at Finance Watch, said:

What we’ve seen over the past weeks has been years in the making. We have seen scandal after scandal at Credit Suisse. Banking is all about trust, and trust in Credit Suisse has been broken. When a bank fails or is likely to fail, we always see the same thing – central banks and governments bail out private interests like firefighters. When the fire is out, we’re left with a banking system that asks citizens to pay for the wealthy and gives capital too easily to banks that make little effort to change. This must stop.

Finance Watch believes that as a result of reforms made following the global financial crisis, the European banking system is in a stronger position than 15 years ago. However, the sector was starting from a very low baseline. Finance Watch continues to stress the importance of increasing capital requirements for banks to ensure they can cover potential losses in the event of another crisis.

To arrange an interview with Thierry Philipponnat, Chief Economist at Finance Watch, please contact Alison Burns at alison.burns@finance-watch.org or call on +32 (0)471577233

About Finance Watch

Finance Watch is an independently funded public interest association dedicated to making finance work for the good of society. Its mission is to strengthen the voice of society in the reform of financial regulation by conducting advocacy and presenting public interest arguments to lawmakers and the public. Finance Watch’s members include consumer groups, housing associations, trade unions, NGOs, financial experts, academics and other civil society groups that collectively represent a large number of European citizens. Finance Watch’s founding principles state that finance is essential for society in bringing capital to productive use in a transparent and sustainable manner, but that the legitimate pursuit of private interests by the financial industry should not be conducted to the detriment of society.

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