In recent times, the financial world has been shaken by scandals, bankruptcies, and market uncertainties, particularly focusing on the fall of Silicon Valley Bank (SVB) and ensuing panic surrounding Credit SuisseThe stream of events has brought about considerable anxiety among investors and institutions alike.

“When Credit Suisse helped Luckin Coffee with its IPO, who would have thought that one day Luckin’s market value would surpass their own?”

This humorous remark is now a common quip circulating within market discussions.

Credit Suisse, established in 1856, is Switzerland's second-largest bank and has faced an array of critical challenges in recent years

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These include the spectacular collapse of Archegos Capital, the downfall of Greensill Capital, and significant breaches of customer data confidentialityAs a result, the bank has suffered from tarnished reputation and considerable financial losses, prompting many shareholders to flee.

On March 15, a significant blow was dealt to Credit Suisse as the bank acknowledged major discrepancies in its financial reporting, leading to the largest daily stock price decline on recordSubsequently, the Swiss National Bank intervened to provide some measure of support.

This whirlwind surrounding Credit Suisse has intensified fears regarding the stability of the global banking system, reminiscent of times not so long ago.

That same evening, the European Central Bank committed to increasing interest rates by 50 basis points, affirming the resilience of the Eurozone banking sector and its robust capital and liquidity position

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They assured the markets that they were prepared with necessary tools to provide liquidity support when needed.

A Triggering Event

The aftermath of the SVB crisis continues to reverberate throughout financial marketsRenowned investor Robert Kiyosaki, who accurately predicted the Lehman Brothers collapse in 2008, recently warned that Credit Suisse might be next to go under as rising interest rates and collapsing bond prices create turmoil in the financial landscape.

On March 14, the bank consequently acknowledged flaws in its annual reporting processes for both the 2021 and 2022 fiscal years

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It had faced scrutiny from U.SSecurities Regulators regarding its financial statements, forcing it to delay the publication of its annual report.

Moreover, the auditing firm PwC cast a “negative opinion” regarding the effectiveness of Credit Suisse’s internal controls, amplifying concerns regarding the potential for material misstatements within financial reports.

The challenges compounded for Credit Suisse as a major shareholder, the Saudi National Bank, announced it would not provide further assistanceThis pronouncement accelerated significant losses as Credit Suisse stock plummeted by 24%, marking its steepest decline on record.

Coinciding with this stock drop, concerns surrounding the bank's credit default swaps (CDS) surged, with many institutional investors rushing to acquire protection against potential defaults, echoing sentiments of distress and uncertainty.

CDS serves as a financial product that allows investors to hedge against the risk of default in bond issuances—its rising premiums indicate an escalating perception of risk among investors

By March 14, CDS levels for Credit Suisse skyrocketed, surpassing those observed even at the height of the 2008 crisis, exemplifying the extent of market apprehension.

Mark Heppenstall, president of Penn Mutual Asset Management, remarked that the trading levels of Credit Suisse's CDS reflect a deep-seated crisis of confidence among investors as they seek every possible method to obtain protection.

Reports conveyed by CNBC suggest that institutions like BNP Paribas have taken even more aggressive stances, ceasing to accept CDS transactions related to Credit SuisseSeveral American banks have also opted to minimize their dealings with the troubled bank to mitigate exposure to risk.

A Cycle of Losses

For years, Credit Suisse has been embroiled in a myriad of issues affecting its standing within the European banking industry

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The roots of its operational troubles are long-standing and multifaceted.

In March 2021, the collapse of Archegos Capital brought about immense losses for Credit Suisse, totaling $5.5 billion, significantly impacting the bank’s financial health.

The very same month saw Greensill Capital, a London-based fintech company, file for bankruptcy after it was unable to meet its loans amounting to hundreds of millionsCredit Suisse’s funds, heavily invested in Greensill’s products, faced liquidation and an impending lawsuit due to the staggering losses.

The cascading impact led to significant declines in revenue across its wealth management and investment banking divisions, culminating in a net loss of CHF 1.626 billion in 2021, the first loss since 2018.

Following substantial reputational damage, questions surrounded the bank's risk management capabilities

In a bid to regain its standing, Credit Suisse underwent a strategic overhaul and was seen attempting to attract investors primarily from the Middle EastYet, these efforts did little to mitigate the rampant outflow of clients and capital.

In February 2022, a massive data breach affecting 18,000 customers further tainted Credit Suisse's reputation, with hackers revealing that they provided services to a plethora of criminal clients from oligarchs to drug traffickersIn a historic judgment, Credit Suisse became the first major bank in Switzerland to be convicted in a criminal case.

The bank’s long-standing internal controls problems contributed to a continue decline in stock price, falling nearly 80% from its peak at $14.90 in February 2021 to $3.92 by September 2022.

In terms of financial metrics, Credit Suisse's total assets plummeted from CHF 819 billion in 2020 to CHF 531 billion by 2022, showing a severe deterioration in its capability to manage loans and deposits.

Last October, after enduring four consecutive quarters of losses, concerns regarding Credit Suisse's capital deficiency and liquidity risks intensified, fuelling bankruptcy rumors as customer withdrawals surpassed CHF 110 billion during the fourth quarter.

By February of this year, Credit Suisse announced a staggering net loss of CHF 7.29 billion for 2022, marking its worst annual loss since the 2008 financial crisis and its second consecutive year of losses.

Central Bank Intervention

In dire straits, Credit Suisse has recently planned to secure a loan of up to CHF 50 billion from the Swiss National Bank through a guaranteed loan initiative, along with a cash offer to repurchase senior debt securities worth approximately CHF 3 billion, demonstrating the urgency for stabilizing its operations.

On March 15, a joint statement by the Swiss National Bank (SNB) and the Swiss Financial Market Supervisory Authority (FINMA) clarified that the issues faced by certain U.S

banks would not pose a direct risk of contagion to the Swiss financial market, asserting that Credit Suisse met the capital and liquidity requirements imposed on systemically important banks.

Furthermore, the statement highlighted that authorities were closely monitoring the developments and maintaining communication with the Swiss Federal Department of Finance to uphold financial stability.

The imposition of higher capital and liquidity requirements on systematically important banks aims to buffer against substantial crises and impacts in the future.

International Strategy Researcher Chen Jia believes that the crisis afflicting SVB resulted from negligence towards macro risk posed by rapid interest rate increases, while for Credit Suisse, long-standing lapses in risk governance have culminated in an unavoidable liquidity crisis.

Chen noted that while these crises appear different, underlying issues of control and governance in both institutions present severe challenges.

Renowned investor Cheng Yu remarked that the risk factors are tangible, indicating a significant possibility of bad debts looming over Credit Suisse, especially after the Saudi National Bank's refusal to extend support

With the current backing from the Swiss National Bank acting as a vital lifeline, there must be vigilance for underlying risks cropping up within the market environment.

CICC posits that a responsive and timely approach to policy-making is essential for stabilizing market sentiment; otherwise, market fluctuations could provoke even deeper issues.

A Crisis of Trust

Unlike SVB, Credit Suisse stands as a globally systemically important bank, with approximately CHF 500 billion (about $540 billion) in total assetsIts extensive global operations embody systemic risks in a tightly interwoven financial landscape.

Hidden risks often prove to be the biggest dangers

The uncertainty surrounding potential contagion and magnitudes of crises is consequently hard to predict accurately.

Researcher Yang Haiping at the Central University of Finance and Economics highlighted that current challenges for European and American banks revolve around liquidity concerns and trust crises, especially with tightening macro liquidity due to aggressive interest raise policies by central banks.

"The emergence of risk within individual institutions may not seem alarming," Yang remarked, "but as incidents like those at Blackstone, Silicon Valley Bank, Signature Bank, and now Credit Suisse arise, a transmission of risk appears to be manifesting." This unfolding string of crises appears to exemplify the Heineken's law—the emergence of unforeseen market dynamics leads to pervasive financial turbulence.

The Start of a Bear Market?

The dual blows delivered by the SVB collapse and Credit Suisse turmoil have brought about historic tremors across the U.S

treasury markets: Following Federal Reserve Chair Jerome Powell’s hawkish remarks during a congressional hearing, the yields on two-year treasuries skyrocketed beyond 5%, only to plummet to below 4.2% within just 72 hours after the SVB disaster unfolded.

"This level of fluctuation has not been observed since the 2008 financial crisis," remarked ChenWhile the U.Shas presumably stabilized the smaller bank crisis sparked by SVB, the aftermath has incited new tremors in the bond market and ethical dilemmas surrounding the financial regulatory framework, potentially sowing seeds for future crises.

Market analysts have begun to speculate that the crises surrounding SVB and Credit Suisse may signal the onset of a new bear market

Morgan Stanley Chief U.SEquity Strategist Michael Wilson noted that the risk premium in equities could witness reevaluation, projecting a shift in sentiment towards selling stock holdings until new lows consistent with a bear market are established.

Monetary Policy Shift?

The liquidity issues plaguing banks have triggered expectations around shifts in monetary policy among European and American central banksIn just a single week, forecasts for a 50-basis point hike by the Federal Reserve changed to expectations for a 25-basis point increase or even none at all, with institutions now betting on potential cuts within the year.

However, on March 16, the European Central Bank defied the brewing banking crisis by moving forward with a 50-basis points rate hike

This decision lifted the rates on deposits to 3%, marginal lending to 3.75%, and mainstream refinancing to 3.5%.

According to Zhu Zefe, the macroeconomic research head at Credit Suisse Private Banking, “Central banks are likely to exercise caution while monitoring tightening credit conditionsUnlike in previous banking crises, the current macroeconomic environment is fraught with challenges, including persistent inflationary pressures.”

“We anticipate the Fed will raise rates by 25 basis points next week, but will pause thereafterThe Fed’s Powell may emphasize the lagging effects of monetary policy as validation for the suspension of rate hikes