RiskOctober 7, 2022

Is Credit Suisse the Next Lehman Brothers?

That question’s the buzz on social media, but the ailing bank seems to have wherewithal to keep going.

Reported by Larry Light

Talk is rife on Twitter and other social media that troubled Credit Suisse may become this decade’s Lehman Brothers—a large bank failure that would shake the world and usher in a vicious economic downturn. And you can’t just write off the social media chatter as idle panicky drivel.

The firm’s credit default swaps, in effect insurance against its defaulting on its debt, have jumped lately to their highest level. This implies an almost 25% chance that Credit Suisse will file for bankruptcy in the next five years. All three major credit ratings agencies—S&P, Moody’s and Fitch— now have a negative outlook on Credit Suisse, likely due to the swaps situation.

All this scary stuff has prompted the company, analysts and other financial figures to argue that Credit Suisse has the juice to stay in business. The mere fact that they have to mount these defenses argues that the bank has serious weaknesses. The bank didn’t return a request for comment.

The company has been unprofitable for the past three quarters. Over the past five years, Credit Suisse’s stock price has fallen by some 75%. It has had a revolving door of top executives.

True, when Lehmann was suffering in 2008, weighed down by its exposure to subprime mortgages, there was a lot of hopeful palaver that things were not that bad—until the bank collapsed and touched off the global financial crisis. And right now, Europe at least seems hell-bent for a recession, owing to the Ukraine-Russia war and Moscow’s natural gas cutback.

But this time, odds are that the commentators have a valid point, that Zurich-based Credit Suisse has sufficient capital and liquidity to weather whatever storms roll in.

“I do not think this is a ‘Lehman moment,’” Mohamed El-Erian, an adviser to Allianz, told CNBC.

“We would be wary of drawing parallels with banks in 2008,” Citigroup analysts said in a client note.

Looking it Credit Suisse’s second quarter, “we see its capital and liquidity position as healthy,” JPMorgan Chase analyst Kian Abouhossein wrote.

It’s comforting that large banks worldwide, to include Credit Suisse, hold much more capital than they did in 2008. As of June, Credit Suisse has a leverage ratio—which measures capital as a portion of assets, mainly loans—of 6.1%, a much better score than other European banks such as Deutsche Bank and BNP Paribas.

Indeed, last year’s collapse of Archegos Capital Management has a lot of folks on Wall Street and bourses through the world on edge. The Archegos mess cost Credit Suisse $5.5 billion, showing how interconnected the financial community remains. Archego’s fall, of course, would be nothing like one involving Credit Suisse. Or for that matter, Lehman.