Swiss regulators offer Credit Suisse financial lifeline

Before the regulator’s announcement, shares of the Swiss bank had fallen 24% to a new low. Its bond prices fell to worrying levels, suggesting investors were pricing in the possibility of the bank defaulting. US-listed Credit Suisse shares surged in the minutes after the announcement, closing 14% lower and then recouping some of those losses in after-hours trading.

The Swiss National Bank and Finma, Switzerland’s top financial regulator, said Credit Suisse “meets the higher capital and liquidity requirements that apply to systemically important banks.” Regulators gave no details on what kind of liquidity they would offer but said they are in very close contact with the bank.

The Credit Suisse sell-off had quickly spread to European banks, sparking a furious and destabilizing run on government bond safety. Traders reported difficulties buying and selling government bonds in the worst episode of market disruption since the panic days when Covid-19 hit the global economy exactly three years ago.

Shares in France’s two major international banks, Société Générale SA

and BNP Paribas SA,

fell more than 10% on fears that financial ties to Credit Suisse could spread. Deutsche Bank shares Inc

9% slipped.

The fall in Credit Suisse bonds and shares suggests that “investors believe this bank needs to be bailed out,” said Joost Beaumont, head of banking research at Dutch lender ABN Amro.

“If regulators don’t handle Credit Suisse’s situation well, it will send shockwaves through the entire sector,” he said. “To make matters worse, both sides of the Atlantic have banking problems.”

The worsening of problems at Credit Suisse comes days after two major bank failures in the US, raising concerns that institutions at the heart of business and trade are grappling with the sharp rise in interest rates over the past year.

Credit Suisse bail-in bond prices, which will be destroyed if the bank gets into serious trouble, have fallen sharply. Bid prices for the 2027 bonds on Tradeweb slipped to 31 cents on the dollar from 72 cents the previous day. They were trading for nearly 90 cents earlier in the month.

Credit Suisse has been the problem child of European banking for several years. Repeated scandals and financial losses have hit the 166-year-old bank, which combines a wealth management firm serving the world’s wealthy elite with a Wall Street investment bank.

The lender has gone through executives and repeatedly tried to stabilize its reputation with investors. A $4 billion share sale in the fall that attracted well-funded Middle Eastern investors gave the bank more time to put its situation in order. Still, it has faced an exodus of customer withdrawals.

The plunge in shares came after the chairman of Credit Suisse’s largest shareholder, the Saudi National Bank, said in a Bloomberg TV interview that the lender was not considering increasing its investments, citing regulatory rules. The National Bank of Saudi Arabia owns 9.9% of Credit Suisse.

The comments struck a chord with investors. Credit Suisse shareholders have been concerned for months about the bank’s ability to make money, fearing it may have to resort to shareholders again for funds. That may become more difficult if the bank’s largest shareholder says it will not participate in further fundraising.

Credit Suisse chairman Axel Lehmann told a conference in Saudi Arabia on Wednesday that the bank’s capital and balance sheet are strong and that “we have all hands on deck” to address problems. He said the prospect of government aid was “not an issue at all”.

But the bank’s troubles have been piling up like a bang, bringing little peace of mind to cautious investors in Credit Suisse. On Tuesday, the bank said it found significant weaknesses in its financial reporting. While the failures did not alter the company’s financial results, the outage increased concerns about the bank’s ability to stay out of trouble.

Credit Suisse is the second largest bank in Switzerland after the UBS Group Inc

and is a major player in the international financial markets with offices throughout Europe and Asia and a significant US operation. It had around $580 billion in assets at the end of 2022, more than twice the size of Silicon Valley Bank, which went bust last week.

The bank is classified as a “systemically important financial institution” under international banking rules created after the collapse of Lehman Brothers. Such designations require the bank to hold larger amounts of capital and maintain plans for the orderly winding-up of its operations in the event that it encounters difficulties.

Like Silicon Valley Bank, Credit Suisse has seen large deposit outflows in recent quarters. Some local entities briefly exceeded regulatory liquidity coverage ratios last fall. That means they didn’t hold enough easy-to-sell assets like bonds to safely cover customer withdrawals.

Unlike Silicon Valley Bank, Credit Suisse doesn’t have mountains of “held-to-maturity” assets. But it has a strained business model that the bank believes will make losses this year as it restructures its workforce and seeks to sell assets in a non-core unit.

Credit Suisse’s funding costs, or what it has to pay to depositors or lenders, have skyrocketed, further limiting the bank’s ability to generate profits.

Credit Suisse’s problems threaten the financially heavy Swiss economy. Banking sector wealth accounted for around 500% of gross domestic product there in 2020, about five times the size of the US

Credit Suisse’s US arm is regulated by the Federal Reserve and other financial regulators. As part of the Swiss bank resolution, the financial regulator Finma would take over the global operations of any failing bank and convert debt into equity and write down securities counting towards regulatory capital. The regulator said its approach avoids complex and messy jurisdictional disputes between agencies.

The US Treasury Department is monitoring developments at Credit Suisse and is in contact with foreign partners, according to a spokesman.

Officials at the European Central Bank contacted the lenders it oversees on Wednesday to inquire about financial exposures to Credit Suisse, according to people familiar with the matter.

An ECB spokeswoman declined to comment.

Credit Suisse has suffered from clients withdrawing deposits and other assets it manages on behalf of wealthy clients. The bank said Tuesday outflows had slowed but not reversed.

David Callahan, head of cash solutions at Lombard Odier, a smaller competitor of Credit Suisse in Switzerland, said his own clients were nervous.

“Credit Suisse is driving most of the concerns we hear about. The SVB closure and other bank closures that have followed have people questioning whether placing large deposits for cash management is the right thing to do.” He said the money market funds he manages do not hold any Credit Suisse assets.

Nervousness in the markets prompted bank executives to petition ECB officials on Thursday to postpone a planned half a percentage point rate hike.

Lorenzo Bini Smaghi, a former ECB board member and head of Société Générale, said in an interview with German newspaper Boersen-Zeitung that the financial contagion has already led to some tightening of monetary conditions. If overdone, the ECB could risk a repeat of 2011, when it kept raising interest rates despite contagion from Greece’s debt problems.

“When one part of the financial system goes into crisis, it’s normal for the whole system to get infected as investors ask, ‘Who’s next?'”

Write to Margot Patrick at margot.patrick@wsj.com, Patricia Kowsmann at patricia.kowsmann@wsj.com, and Caitlin Ostroff at caitlin.ostroff@wsj.com