Credit Suisse is in Deep Trouble Because of Credit Default Swaps

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Last Updated on October 4, 2022 by Bitfinsider

The answer lies in credit default swaps, or CDS. Simply put, CDS is an insurance policy that lenders take out against loans they have made.

Credit Suisse borrows money to conduct business in this case. Its lenders purchase insurance in the event that Credit Suisse defaults on its obligations. They must pay a premium to the issuer for this, just as you would for your insurance policies.

The problem is that the price of these Credit Suisse CDSs is now off the charts – higher than it was in 2008, when the banking industry was on the verge of collapse.

This, combined with Credit Suisse’s inefficient risk management policies – the bank was involved in two massive debacles, Greensill and Archegos Capital, in which its investors lost billions of dollars – has limited the bank’s avenues for obtaining finance, increasing its borrowing costs.

Credit Suisse is currently in the position of a person who has had multiple defaults in the past, eroding their capital and causing their credit rating to plummet. As a result, because lenders are wary of defaults, that person’s borrowing costs rise. This increases the likelihood of the individual going bankrupt and investors losing money.

Aside from that, the bank has lost three consecutive quarters, prompting the appointment of a new CEO in August. It has also lost over 60 executives in the last 18 months, with the most recent high-profile departure being Jens Welter, who left Credit Suisse after 27 years.

Analysts believe that this is not 2008, and that Credit Suisse has several options for escaping the current crisis. “We would be cautious of drawing parallels with 2008 banks or Deutsche Bank in 2016.” “Credit Suisse has a CET1 (Tier 1 capital) ratio of 13.5%, which is high compared to peers and would imply Swiss Franc 2.5 billion of excess capital vs a 12.5% ratio,” according to a Citi Research report.

To summarize, Credit Suisse may face higher financing costs in the interim until the bank’s management plans and implements a restructuring strategy.

Everything depends on Credit Suisse’s ability to navigate these turbulent waters and effectively execute its restructuring strategy. After all, the ‘all is well’ play can only last so long before the fundamentals kick in.

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