SWITZERLAND’S role as banker to the world’s rich was built on a reputation for institutional discretion and dull reliability. That only makes the scandals, public legal battles and mounting losses at Credit Suisse Group more striking and hard to comprehend.

By mid-March, unease about the bank’s problems had turned into full-blown panic, its shares slumped and management was forced to call for help from the country’s central bank.

What went wrong?

Credit Suisse’s failings have included a criminal conviction for allowing drug dealers to launder money in Bulgaria, entanglement in a Mozambique corruption case, a spying scandal involving a former employee and an executive and a massive leak of client data to the media. Its willingness to engage with clients that some other banks avoided, such as disgraced financier Lex Greensill and failed New York-based investment firm Archegos Capital Management, lost it billions of US dollars and compounded the sense of an institution that didn’t have a firm grip on its affairs. Many fed up customers voted with their feet, leading to unprecedented client outflows in late 2022. The loss of business was especially dramatic in Asian wealth management, which for many years had been an important source of profit growth.

What triggered the latest share slump?

Chief executive officer Ulrich Koerner launched a massive outreach to woo back nervous clients and their cash. The effort appeared to be paying off by January, when it reported “net positive” deposits. However, on March 9, the US Securities and Exchange Commission queried the bank’s annual report, forcing it to delay its publication. Panic spread after the failure of regional US lender Silicon Valley Bank underscored how higher interest rates were eroding the value of the banking industry’s bond holdings. Investors began ditching anything that smelled of banking risk and deposit flight.

How bad did the situation get?

Credit Suisse stock slumped as much as 31 per cent on Mar 15 when the chairman of its largest shareholder, Saudi National Bank, ruled out investing any more in the company. This prompted Credit Suisse to ask the Swiss central bank for a public statement of support. The cost of insuring the bank’s bonds against default for one year surged to levels not seen for a major bank since the global financial crisis of 2008. In another sign of stress, its additional tier 1 bonds – which are subordinate to all other ranks of debt and may be written down if capital falls below a predetermined level – dipped below 80 per cent of face value, a level typically signalling distress.

What were Swiss authorities doing about it?

Aware of the potential economic fallout if Credit Suisse collapsed, the central bank offered to lend it as much as 50 billion Swiss francs (S$72.3 billion) and buy back as much as 3 billion francs of debt. The investor panic subsided, giving the bank’s management and the Swiss government some time to seek a way out of the mess. The government has floated the idea of acquiring a stake in Credit Suisse as part of a capital increase if necessary. Other options being discussed included a separation of the lender’s Swiss unit and a long-shot orchestrated tie-up with larger Swiss rival UBS Group.

GET BT IN YOUR INBOX DAILY

Start and end each day with the latest news stories and analyses delivered straight to your inbox.

Sign UpVIEW ALL

Could this be another Lehman Brothers moment?

The Wall Street giant, whose failure in 2008 triggered the global financial crisis, succumbed when funding dried up and other banks stopped dealing with it. Unlike Lehman and SVB, Credit Suisse has substantial liquid assets to call upon and access to central bank lending facilities and is less sensitive than many rivals to sharp moves in interest rates. It has rebuilt its cushion against more deposit withdrawals since the worst wave of outflows in October. It also has enough money-like liquid assets to pay back half of all its liabilities in deposits and loans from other banks, according to Bloomberg Opinion banking columnist Paul J. Davies. Koerner said the firm’s liquidity coverage ratio showed it can handle over a month of heavy outflows in a period of stress.

Why does this matter?

The crisis at Credit Suisse and the failure of three US regional lenders may push other banks to lower their risk profile, which means issuing fewer of the loans that enable economies to grow. That would make it harder for central banks to keep raising benchmark rates to cool red-hot inflation without causing recessions. Investors have been abandoning bets on more rate hikes and now see US rate cuts coming as early as the summer. European Central Bank President Christine Lagarde said the financial market turmoil could hit credit conditions and dampen confidence. However, she said the banking sector was “in a much, much stronger position than where it was back in 2008.”

What was Koerner doing to turn things around?

His plan – if the bank escapes the latest turmoil unscathed – involves dismantling the investment banking behemoth assembled over five decades and returning Credit Suisse to its origins as banker to the world’s ultra-wealthy. That means reviving the First Boston brand it acquired in 1990 and spinning out some of the division’s strongest businesses with a view to a listing in 2025. A return to the Swiss bank’s roots might assuage some critics, including former chief executive officer Oswald Gruebel, who say the foray into investment banking brought a culture of risk taking in search of big profits. Koerner’s downsizing hasn’t been made any easier by the volatility in markets after the SVB collapse. BLOOMBERG