Credit Suisse’s setback raises fears of a new Lehman Brothers

(BFM Bourse) – Concerns about Credit Suisse’s situation have revived the scenario of a Lehman Brothers that caused the financial crisis of 2008. For many observers in the financial world, these fears are unfounded. Indeed, European banks are much more armed than in 2008, driven by tighter capital rules.

The setback of Credit Suisse, rocked by a series of scandals and whose stock market value has tripled in a year and a half, is reviving the specter of the first major victim of the 2008-2009 financial crisis, US bank Lehman. Brothers.

For nearly three weeks, the share price has fallen to low after low as rumors swirl about the approach to a balance on its strategy. Its new CEO, Ulrich Körner, who is considered a restructuring specialist, was given at the beginning of August the heavy task of carrying out a strategic review to turn the bank around, which he must take stock of on 27 October.

But last week, credit default swaps rose. These derivatives are used by investors to protect themselves against the risks of non-repayment of a debt, as their increase means that investors require more guarantees for the obligations linked to Credit Suisse.

A price at a historic low

On Monday, the action of the number two in the Swiss banking sector fell by almost 11.5% in the first exchanges, reaching a new all-time low of 3.518 Swiss francs after a new round of rumors over the weekend. The title finally closed down by a little less than 1% at CHF 3.94.

On social networks, discussions about a “Lehman Brothers moment”, referring to the American bank that had failed in 2008 and marked the onset of the Great Financial Crisis, spread like wildfire, although many observers in the financial world reject this. risk.

For the European Systemic Risk Board (ESRB), linked to the ECB, the second Swiss bank and the European banking system as a whole are better equipped than then to deal with a crisis.

Why is Credit Suisse’s situation worrying?

By letting Lehman Brothers fail in 2008, the Bush administration hoped to set an example without having measured all the consequences. The establishment’s bankruptcy thus led market participants to believe that other companies might follow suit, underscoring the difficulties and requiring the intervention of many states. The Belgian-Dutch holding company Fortis was thus liquidated, as the Belgian subsidiary came under the control of the French BNP Paribas.

In particular, many other institutions that were considered “too big to fail” (too big to fail) had to be bailed out immediately, at the risk of a complete collapse of the financial system. The American insurance company IAG or the Franco-Belgian bank Dexia, which ultimately did not survive the Greek debt crisis, were among the rescued establishments.

However, these bailouts were very expensive for public finances and triggered the subsequent debt crisis and led to austerity, especially in Europe.

Tests to measure the solvency of banks

Under pressure from the European supervisory authority, banks have made significant efforts in the past decade to be more robust in the event of a crisis. For example, they must demonstrate a higher minimum level of capital to absorb any losses. This hard capital ratio, also called CET1, is the work of the Basel Committee in Switzerland.

Credit Suisse disclosed in its half-yearly financial statements, published at the end of July, a solvency ratio of 13.5%. By comparison, it is 12.2% for BNP Paribas, 14.93% for the Italian Unicredit and 13% for Deutsche Bank.

This capital ratio, which makes it possible to cope with unexpected losses, was “greatly reinforced” after the 2008 crisis, assures the head of the banking team in Paris at the rating agency Moody’s Alain Laurin, and the way of calculation has been changed in a more restrictive sense.

The European Banking Authority is also subjecting 50 large banks on the continent to stress tests. The results for the latest financial year, published at the end of July 2021, showed that the companies were well able to withstand a severe economic crisis without too much damage.

A new domino effect to fear?

The experts contacted by AFP want to be reassuring for now. First, Credit Suisse “remains a solid financial institution,” says Guillaume Larmaraud, partner in charge of financial services at Colombus Consulting.

So, even in the event of a crisis, “the banks’ financial solidity is extremely strong, lessons from 2008 have been well learned,” Vanessa Holtz, head of France at Bank of America, told AFP. In the event of the failure of a bank player, the European continent “now has a framework” to get it out of the rut, regardless of size, added in February the president of the Spanish bank Santander Ana Botín, also president of the European banking lobby.

And if, as a last resort, governments were tempted to take out the portfolio to save a company, unlike the situation before 2008, a framework initially allows shareholders or the biggest creditors to pay. The banks also contribute to a European fund, which must avoid presenting too heavy a bill to taxpayers.

(With AFP)

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