In Switzerland, banks, authorities and the government are advising on the rescue of the ailing major bank Credit Suisse. It is one of the most important money houses in the world. If the number two of the Confederates hit the wall, it would have consequences for millions of savers and investors. Also in Germany.
Everyone involved is trying to quickly restructure the ailing Credit Suisse (CS). The chances are good that successes can still be reported on Sunday.
The problem: If that doesn't succeed, investors and consumers will experience a "turning point 2.0" on Monday morning. With dramatic consequences, because ...
The share price of CS is likely to collapse.
Something similar will happen to corporate bond prices. Values in the billions vanish into thin air within minutes.
Because CS is so important, its downfall had an impact on the entire industry: the share prices of Deutsche Bank and Commerzbank would plummet. The financial economy in other countries would also fall victim to the turbulence. And the stock exchanges will probably collapse in double digits worldwide.
So that worried savers do not plunder their accounts ("bank run"), governments would have to issue extensive guarantees. Chancellor Olaf Scholz and Federal Minister of Finance Christian Linder would have to appear in front of the media and declare: "The savers' money is safe." Because the bank guarantee of 100,000 euros per customer and bank is not enough for this. Especially since customer confidence would be in the basement.
The ECB and the US Federal Reserve are unlikely to continue pursuing their policy of tight interest rate hikes as they have been up to now. In the worst case, they would even have to flood the markets with new trillions. As a result, inflation would shoot up even further. Consumers, savers and investors would suffer. Nobody can want that – which is one of the reasons why the Fed is putting pressure on Switzerland.
CS is one of the "systemically important" banks
Therefore, the parties involved are negotiating a "forced rescue" of CS by the other major Swiss bank UBS. But she wants extensive guarantees from the government in Bern so that she doesn't run the risk of getting into trouble herself. According to CNBC, the guarantee amounts to the equivalent of six billion euros.
The Swiss government and the financial market regulator Finma are sitting at the negotiating table alongside the top managers of the banks. Everyone involved is clear: a solution must be found this Sunday. Otherwise there is a risk of chaos on the stock exchanges and financial markets on Monday morning. The central banks of the USA and Great Britain also see it that way. According to media reports, they are putting pressure on the Swiss. Because CS is considered “too big to fail”. That means: it is so important for international finance that it must not go under.
What could happen if the protagonists disagree and the CS gets even deeper into the mess?
Sometimes a look into the past helps. After the financial crisis, UBS was in trouble and had to be rescued by Switzerland. Ironically, UBS, which is now supposed to help CS. So the UBS staff should know what to do.
In 2008, UBS received $54 billion from the National Bank SNB and $6 billion from Bern. So about as much money as CS got this week. At that time the world experienced a global banking crisis, triggered by bad real estate loans in the USA.
Among other things, the central banks have learned their lessons from the financial crisis insofar as banks now have to hold more equity capital in order not to be endangered so quickly.
However, the current crisis in Zurich shows that the Chose cannot work entirely without states. In times of crisis, the markets are not so stable that they pull themselves out of the swamp by their own bootstraps. In times of dire need, governments must issue guarantees to calm markets and prevent chaos.
Financial markets must become more resilient
To prevent the current crisis from being repeated in some other part of the world, governments and financial regulators must ensure that financial markets become more resilient.
This is also what the renowned Harvard economist Kenneth Rogoff says in a recent interview. He complains that the bank regulations following the Lehman bankruptcy in 2008 are not sufficient. Risky businesses have migrated from the big banks to smaller competitors. Rogoff demands that politicians "finally carry out structural reforms" in the banking sector.