More than £75bn wiped off FTSE 100 amid Credit Suisse crisis

More than £75bn was wiped off the FTSE 100 on Wednesday, as Swiss authorities stepped in to reassure panicked markets over the health of the embattled European banking giant Credit Suisse.

The Swiss central bank and its financial markets regulator issued a joint statement on Wednesday evening, pledging to provide emergency funding if necessary. They insisted there was no “direct risk” of contagion from turmoil in the US banking system, after the sudden collapse last week of the US lender Silicon Valley Bank.

“Credit Suisse meets the capital and liquidity requirements imposed on systemically important banks,” the Swiss National Bank said. If necessary, it said, it would provide Credit Suisse with liquidity.

The comments followed a market rout, prompted by earlier comments from Credit Suisse’s largest shareholder Saudi National Bank (SNB), which said it would not be able to stump up more cash because of regulatory restrictions limiting its holding to below 10%.

The suggestion of a limit to support for Credit Suisse, which has reported a 7.3bn Swiss francs (£6.6bn) loss for 2022, sent its shares down more than 30% during the day.

The bank, Europe’s 17th largest lender, has been struggling to keep customers after a string of scandals in recent years. Credit Suisse strengthened its balance sheet with a 4bn Swiss francs (£3.6bn) fundraising in November designed to finance a restructuring plan.

In a statement on Wednesday, the chairman, Axel Lehmann tried to reassure customers and investors, saying: “We have strong capital ratios, a strong balance sheet. We already took the medicine.”

Investors are worried about potential unrealised losses lurking in the portfolios of other European banks. As traders dumped stocks, more than £75bn was wiped off London’s blue chip index. The FTSE 100 was down 3.83%, marking its sharpest one-day drop since Russia invaded Ukraine in February last year. UK-headquartered Standard Chartered fell 7.7% and HSBC, which bought the UK operations of Silicon Valley Bank in a government-brokered deal on Monday, dropped 5%. Barclays fell 9%.

Credit Suisse shares recovered slightly but still ended the day down by 24.5%. The cost of insuring against Credit Suisse defaulting on its bonds also hit a record high on Wednesday.

Shares in other big European banks slumped on the news, with the gyrations triggering stock market circuit breakers that briefly halted trading in Société Générale, BNP Paribas, Monte dei Paschi di Siena and UniCredit. The Swiss lender UBS dropped 8.7% and Germany’s Deutsche Bank slipped 9.2%.

Regulators in the US and UK were monitoring the situation as stocks continued to slide.

The Bank of England said the UK banking system was not at risk. The central bank, which is in charge of monitoring financial stability, referred to its statement released earlier this week, which said: “The wider UK banking system remains safe, sound, and well capitalised.”

Credit Suisse’s problems – which have led to a leadership overhaul and sparked a wide-ranging turnaround plan in recent months – are relatively unique and should not come as a surprise to investors, according to some analysts.

The lender has been trying to draw a line under multiple scandals over the past decade involving corporate espionage, alleged misconduct, sanctions busting, money laundering and tax evasion.

In the past two years alone, Credit Suisse has admitted to defrauding investors as part of the Mozambique “tuna bonds” loan scandal, resulting in a fine worth more than £350m; and been embroiled in the collapse of the lender Greensill Capital and the US hedge fund Archegos Capital in 2021. It also came under fire after the Guardian and other media outlets revealed the bank had been serving clients involved in torture, drug trafficking, money laundering, corruption and other serious crimes over decades.

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The bank has since suffered an exodus of clients, who have continued to pull their cash, contributing to ballooning losses that grew to 7.3bn Swiss francs in 2022. It has since been abandoned by its former top shareholder, Harris Associates, which revealed earlier this year that it had dumped its entire stake amid frustration over Credit Suisse’s strategy and failure to stem losses.

However, Andrew Kenningham, the chief European economist at Capital Economics, said there are still questions about potential weaknesses across the financial system. “The problems in Credit Suisse once more raise the question whether this is the beginning of a global crisis or just another “idiosyncratic case”, he said. Credit Suisse was widely seen as the weakest link among Europe’s large banks, but it is not the only one to have struggled with weak profitability in recent years.

The high-profile economist Nouriel Roubini, known as Dr Doom for having predicted the 2008 financial crisis, warned that while Sillicon Valley Bank’s collapse had a “ripple effect” on the financial sector, any potential failure by Credit Suisse could prove to be a “Lehman moment”, referring to the collapse of the US investment bank Lehman Brothers in August 2007 that sparked the global banking crunch.

Markets are now expecting that central banks including the Bank of England may hold back from raising interest rates further, amid fears that further hikes could increase pressure on investment portfolios. All eyes are on the European Central Bank, which had been expected to announce a half-point increase on Thursday.

Silicon Valley Bank collapsed shortly after revealing it had a hole in its finances, caused by a drop in the value of bonds that it tried to sell to make up for a drop in its tech customers’ deposits. Those bonds had dropped in value due to recent interest rate hikes. The shortfall spooked investors, led to a share sell-off and a run on its deposits, before authorities stepped in last week.

The Bank of England had been given an almost 100% probability by traders in financial markets of raising rates by 0.25 percentage points at its next meeting on 23 March. However, that has since fallen to 40%.

The turmoil came only weeks after Credit Suisse’s former top shareholder, the Chicago-based investment firm Harris Associates, revealed it had dumped its entire stake in the lender in recent months. It said it had become frustrated with Credit Suisse’s strategy, which has failed to stem losses and an exodus of clients. The bank reported a 7.3bn Swiss francs net loss for 2022.

Saudi National Bank gained its 9.9% stake in Credit Suisse this past autumn, after investing 1.5bn Swiss francs as part of a 4bn Swiss franc capital fundraising to support Credit Suisse’s turnaround plan, which is meant to cut the size of its investment bank and focus more on managing assets for wealthy clients.