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Bank of England monitors Credit Suisse amid market turbulence

credit suisse
credit suisse

The Bank of England has been liaising with Swiss authorities after an attempt by Credit Suisse to calm nerves instead stoked fears of further turbulence in the financial system.

There were no major developments at the Zurich-based lender over the weekend after a statement from chief executive Ulrich Koerner on Friday mixed with a febrile atmosphere on global markets to fuel speculation over potential threats to the 166-year-old lender’s stability.

Mr Koerner told employees that Credit Suisse is at a “critical moment” as he prepares restructuring, but urged them not to confuse the “day-to-day” stock price performance with the Swiss firm’s “strong capital base and liquidity position”. Rather than reassure, his statement rattled investors following a week in which the run on pension fund assets triggered by Kwasi Kwarteng’s mini-Budget drew comparisons with the financial crisis of 2008 and the collapse of Northern Rock, and the Wall Street investment bank Lehman Brothers.

Credit Suisse is rated as a systemically important financial institution, but has suffered a series of costly mishaps that have driven its share price down 60pc this year, hitting record lows on Friday. The lender employs around 6,000 people in the City of London and manage almost £1.4 trillion of assets.

The price of its credit default swaps, which investors buy to protect themselves from companies defaulting on their debts, leapt to their highest value since the financial crisis in 2009 as speculators seized on Mr Koerner’s remarks, which were sent to all Credit Suisse’s 45,000 global workforce.

The Prudential Regulation Authority, the Bank of England body responsible for the stability of the financial system, is working closely with colleagues at Finma, its counterpart in Switzerland to monitor Credit Suisse. However, it is understood that the Bank is satisfied that there have been no major recent developments and that speculation was driven by Mr Koerner’s statement.

He took over as chief executive in August with plans to draw a line under a series of scandals that have engulfed the lender in recent years.

It was embroiled in the collapse of Greensill Capital, the controversial finance company that was advised by former Prime Minister David Cameron and failed in March 2021. Credit Suisse also suffered multi billion dollar losses in relation to the failure of hedge fund Archegos Capital Management. Later last year Credit Suisse was fined almost £350m in a loan scandal in Mozambique known as the “tuna bonds” affair.

Mr Koerner is finalising plans for a sweeping overhaul of the lender that will be published later this month. The changes “go beyond the conclusions of last year’s strategic review”, he told investors in a separate note on September 26.

He told staff: “The aim is to create a more focused, agile group with a significantly lower absolute cost base, capable of delivering sustainable returns for all stakeholders and first-class service to clients.

“The bank is currently executing on a number of strategic initiatives including potential divestitures and asset sales.”

The restructuring is expected to trigger thousands of job cuts.

Analysts at KBW have estimated that Credit Suisse may need to raise CHF 4bn (£3.6bn) of capital even after selling some of its assets to pay for the restructuring and change of strategy.

The market jitters in relation to Credit Suisse follow an intervention by the Bank of England to shore up the UK Gilt market after a scare related to "liability-driven investments" prompted fears that many British retirement funds could implode.

Tax cuts in a mini-budget announced by Kwasi Kwarteng, the Chancellor, had spooked short-term gilt markets sending yields soaring. The rising yields left pension funds exposed through liability-driven investments, a derivative hedging strategy where funds are asked to put up more capital to backstop their investment positions.

Deutsche Bank credit default swaps have also risen in recent days, with some analysts raising similar questions about the financial strength of the German bank. Other investors felt doomsday predictions were overblown. Boaz Weinstein, the founder of Saba Capital Management pointed out that Credit Suisse's CDS prices are similar to that of General Motors, with no similar concerns raised about the car maker.

Credit Suisse and the Bank of England declined to comment.