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Fall of Credit Suisse and its effects on Forex in Europe

Author: Sydney Hooke
Sydney Hooke
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Fall of Credit Suisse and its effects on Forex in Europe

Silicon Valley Bank (SVB) and Signature Bank's failure marked a significant period of banking failure in U.S. history. Globally, many financial market investors are beginning to withdraw their investments, and Credit Suisse is at the forefront of things in Europe.

What Happened to Credit Suisse?

Credit Suisse ranks as one of Europe's leading banks and is also rated the second-largest lender in Switzerland. Despite its reputation, however, Credit Suisse is currently battling to persuade Europe's financial market investors that it is financially stable. 

Credit Suisse's financial stability came into question after its announcement on March 9th, 2023, in a note to shareholders that the release of its annual report had been delayed. The bank attributed this delay to the U.S. Securities and Exchange Commission's (SEC) discovery of "material weaknesses" in its financial reporting processes.

However, Credit Suisse's problems began before its notice of delay. The bank was already at risk of a potential bank run because of its vast clientele departure in 2022, which left it cash-strapped. As a result, the announcement of "material weaknesses" further worsened the bank's financial structure.

During periods of financial hardships, it's typical for banks to seek bailouts from other banks, and Credit Suisse is no exception. However, Credit Suisse may have needed more luck in this regard. Many news sources stated that Saudi National Bank, which acquired a 10% share in Credit Suisse in 2022, would stop giving the bank any more financial support.

According to the news sources, Saudi National Bank would not be lending any financial aid to Credit Suisse due to restrictive regulatory guidelines that prevent the bank from increasing its stake. These news reports further raised investors' concerns that significant shareholders would not, in an emergency, step in to save the Credit Suisse bank. 

Ammar Alkhudairy, the former chair of the Saudi National Bank who resigned on March 27th, 2023, for personal reasons, was on Bloomberg TV on March 15th, 2023, where he commented about Credit Suisse. He had clarified that the Saudi National Bank would be lending the Switzerland bank any further aid.

Ammar AlKhudairy, Former Chair Saudi National Bank

During the TV interview, Ammar implied that Credit Suisse did not require additional capital by referring to the institution as "financially sound." However, his comments about the bank raised more concerns among its clients regarding its ability to raise more funds if necessary.

Credit Suisse Liquidity Injection Record 

Since the announcement of its postponed annual report, the value of Credit Suisse's equities, bonds, and shares has decreased. Since their all-time lows in the second week of March 2023, all three have been highly volatile. In a bid to save the situation, the bank opened communication lines with regulators on March 15th, 2023, 

Following its discussions with regulators, Credit Suisse borrowed CHF50 billion ($54 billion) via a liquidity facility offered by the Swiss National Bank. The bank also repurchased $3.2 billion in debt to strengthen its finances and restore its clientele's trust. However, the repurchased debt had reduced in value at that time due to the current financial market crisis.

While the financial aid strengthened the bank's financial records, a statement from the Swiss National Bank further boosted the financial stability of Credit Suisse. According to the statement, there are "no indications of a direct risk of contagion for Swiss institutions due to the current turmoil in the US banking market." 

The statement further credits Credit Suisse for complying with strict capital and liquidity standards. It also allayed the fears of the bank's clientele by affirming that it would receive liquidity support from the Swiss National Bank if needed.

Following the statement from the Swiss National Bank, shares of Credit Suisse in Switzerland surged by 23%, but they are still down by 16% from February. It's important to note that the company's share value has fallen by over 70% over the past year.

What Will Happen to Credit Suisse Going Forward?

Credit Suisse will benefit significantly from the support offered by the Swiss National Bank now that it is attempting to implement a comprehensive restructuring plan to restore its damaged reputation. The bank's three-year recovery plan calls for slashing 9,000 positions, downsizing its securitized products division, and shrinking its investment banking division.

The bank's new three-year recovery plan aims to persuade shareholders that it can still deliver on its promises and withstand the instability plaguing the global financial market. However, the concern in this regard is that the ripple effects of recent and proposed bank closures in the international market would hinder these efforts.

For now, Credit Suisse has salvaged its current financial challenges. The bank's liquidity coverage ratio has been cited by its management as proof that it has access to sufficient cash. The bank's liquidity coverage ratio records suggest it can manage a month's outflows if its financial conditions worsen.

It's also important to note that, unlike SVB in the U.S., Signature Bank is less dependent on interest rates. This implies that the bank may be relatively unaffected by fluctuations in interest rates.

Market expert Matt Simpson has lent his voice to Credit Suisse's survival prospects. In his words, "the Swiss National Bank doesn't mess around during a crisis, and like Deutsche Bank, Credit Suisse has been a 'failing bank,' yet both remain in business." He, however, concluded that the bank's future might remain murky, judging by financial market records.

While there are still some unknowns regarding what may occur next, there have been speculations that the Swiss government may purchase a stake in Credit Suisse to provide further funding. If it does, stockholders will be highly relieved. This is also a clear indication that bailouts are returning. 

On the other hand, Bloomberg has forecasted that Credit Suisse's Swiss division might be split from the bank. It also highlighted the remote possibility that regulators might support a merger with UBS, Switzerland's largest bank.

The Influence of Credit Suisse's Decline on the European Forex Market

The global financial industry is stressed due to higher interest rates, and the forex market will eventually feel the effects. Although increasing interest rates is essential to combating inflation, current rates are persistently high and significantly above ideal levels.

The general financial market expects central banks to hold off on raising interest rates soon to offer stability and prevent the system from being more stressed due to current rates. However, on March 16th, 2023, the European Central Bank raised interest rates by 50 basis points.

Interest rates have an impact on currency exchange values because changes in interest rates have a direct effect on demand for a given currency. However, the result of interest rate changes in the forex market is difficult to predict. This is because changes in the forex market depend on various variables, including the prospective economic stability of a region.

While individual traders can enjoy higher savings returns, and better lending options, when interest rates are raised, this is only sometimes the case in the forex market. A currency's exchange rate is positively impacted when money transfers from currencies with fewer prospects to a currency with greater prospects occur. The preferred currency will increase demand, while the less popular currencies will decline. The exchange rate is what influences the forex market.

Credit Suisse caused a dramatic sell-off in the financial markets, driving the European banking index to its lowest level since the first week in January 2023. Simon Harvey, Head of FX Analysis at Monex, says, "The sell-off raises concerns over the market's financial stability." He emphasized that it is "having a knock-on effect in European government bond and swap markets as the prospect of a more restrained European Central Bank comes back into view."

Since discussions about Credit Suisse's financial stability became talking points in the European financial market, European currencies' value has declined. The euro's value fell by 1.2% to $1.0605, the pound depreciated by 0.8% to $1.2065, and the Swiss franc declined by 1.2% to $0.9251. Hence, a few changes in the European forex market have ensued. 

About Credit Suisse

In 1856, Credit Suisse Group AG was established to fund the expanding Switzerland's rail network. As the middle class grew and competition from UBS and Julius Bär increased in the 1900s, the bank transitioned to retail banking.

Today, Credit Suisse is a Switzerland-based global investment bank and financial services provider with headquarters in Zürich and other offices in financial hubs worldwide. It offers its clientele a repertoire of services which include private banking, asset management, and other shared services are among its offerings. 

The bank is renowned for its stringent banking secrecy and client confidentiality. It also doubles as the U.S. Federal Reserve's dealer and foreign exchange counterparty.

Final Thoughts

The bank crisis in the U.S. is undoubtedly spreading, not necessarily because of external market factors but rather Investors' behavior. The government and regulatory bodies will have to put the word out to assure Investors that their investments are insured in case of a sudden bank closure or seizure. This will help investors regain confidence in the financial market and reduce drastic withdrawals.

From current financial market analysis, forex market investors have nothing to worry about. While the European Forex market may appear unstable, there are projections that it will bounce back with the help of European regulatory bodies. 

However, traders must keep tabs on the Forex market by following live updates and making swift investment moves. The financial market will come off its current recession and gain more stability as financial authorities and central banks stabilize interest rates.

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Risk Warning: Your capital is at risk. Statistically, only 11-25% of traders gain profit when trading Forex and CFDs. The remaining 74-89% of customers lose their investment. Invest in capital that is willing to expose such risks.