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Credit Suisse’s defeault swaps continue to skyrocket indicating a systemic risk in EU banking

Credit Suisse’s defeault swaps continue to skyrocket indicating a systemic risk in EU banking

The global markets might be pointing to a European banking crisis with Credit Suisse (NYSE: CS) at the core of it. The banking giant dominated the news again on Monday, October 3, with reports questioning the bank’s health. 

Credit Suisse is apparently looking for outside investors to raise more capital, which will be used for a spinoff. Furthermore, the capital is to be used to help fund the costs of hiring and keeping talent, according to a Bloomberg report released on October 6.  

Meanwhile, credit default swaps (CDS), insurance purchased against a potential default, are continuing their rise, reaching all-time highs for the Swiss lender. While on Twitter, allegations of a connection of the Swiss lender to the US financial system are rising, indicating that there is a potential systemic risk. 

Credit Suisse CDS. Source: Twitter 

Strategic review

The Swiss bank recently claimed that they would undertake a strategic review that will probably include divestitures and asset sales, with a planned update once they release their Q3 earnings on October 27. 

“The Board of Directors and the Executive Board are considering alternatives that go beyond the conclusions of last year’s strategic review. The aim is to create a more focused, agile Group with a significantly lower absolute cost base, capable of delivering sustainable returns for all stakeholders and first-class service to clients.”

The case of Credit Suisse

While government bonds are usually a bank’s most important assets, the selloff in bonds, exacerbated by the UK bond crisis, contributed to the further weakening of bank balance sheets in Europe. Furthermore, the potential of a recession indicates that non-performing loans could rise and affect the income of banks. 

For the time being, Credit Suisse has a long history of scandals, with parts of the group underperforming, key employees leaving the company, management changes, and the bust of broking and lender clients Archegos Capital and UK’s Greensill Capital

All in all, these developments are pointing to a bleak future for CS, with shares trading 93% lower than their all-time high in 2007. 

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