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Credit Suisse Crisis May Trigger Domino Effect, Eventual Capital Flight from Europe

17 Mar 2023 12:11

Islam Times - Credit Suisse's liquidity crisis may be just the tip of the iceberg as other banks and non-bank financial institutions could become much more fragile and closer to failure, Sergio Rossi, professor of macroeconomics and monetary economics at the University of Fribourg, Switzerland, told Sputnik.

Credit Suisse, a global investment bank and financial services firm, will borrow over 50 billion Swiss Francs [$53.7 billion] from Swiss National Bank [SNB] after investors sent its shares down by as much as 30% on Wednesday.

The Swiss lender's shares plunged after SNB, its top shareholder, ruled out providing it with fresh funding earlier this week. The development shattered the markets, which were already anxious over the collapse of California’s Silicon Valley Bank [SVB] last week.

"This concern is justified, in so far as if such an internationally relevant bank is illiquid, risking also to be insolvent, other banks and non-bank financial institutions might become much more fragile and be close to failure, so much so for banks that are negatively affected by a large and massive bank run. Also, the current uncertainty about the future performance of the global economy increases the fear of a major financial crisis, considering also the mounting problems in regard to so-called crypto-assets," said Rossi.

The professor explained that Credit Suisse has been suffering from a number of strategic mistakes, notably in investment banking activities, such as the Greensill and Archegos failures. The magnitude of Credit Suisse losses has discouraged potential investors to purchase its own stocks, while its major depositors decided to move their savings into a less problematic bank. Outflows of client money reached unprecedented levels in October 2022 and have continued to haunt the lender. Customers withdrew a whopping $133 billion from Credit Suisse last year. Hence, the financial institution has become illiquid, according to the financial expert.

"A domino effect is likely to occur, if the intervention of the Swiss National Bank – which has been providing a credit line up to 50 billion Swiss francs to Credit Suisse – is not going to be enough to avert this bank’s failure and hence a large domino effect across the global financial markets," continued Rossi.

"I do not know which banks could be the next going bankrupt, but I imagine that those banks that have granted a large volume of credits to Credit Suisse might be the next being affected negatively by the current situation."

Stocks in many other European banks also went down on Wednesday driven by panic and negative sentiment. Western media warned that a run on deposits could be risky for smaller European banks that rely more heavily on client cash. Under these circumstances, disenchanted customers may seek to move their funds to somewhere else causing the flight of money from Europe.

"This possibility is quite realistic, particularly as regards hedge funds, money market funds, pension funds, and insurance companies, which can move rapidly from one banking system to another, even in the Asian countries, where the influence of US-dollar-denominated transactions is much lower and therefore there is a much lower risk of bankruptcy in this period," Rossi concluded.

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