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Credit Suisse: What caused this $130 billion crisis and how will it hit Australians?


Shares in European bank Credit Suisse dropped 24% on Wednesday after revealing a "material weakness" in its financial reporting.

Credit Suisse's latest credit report has sent shockwaves through the markets, just days after Silicon Valley Bank collapsed.

The 7th largest investment bank in the world came out saying it had "material weakness" in its reporting controls and that clients were still withdrawing cash despite pauses to its banking operations.

It also says its credit default swaps, or the financial insurance against default are nearing distressed levels.

Mornginstar's equity analyst Johann Scholtz thinks the bank will be able to absorb the loss.

"Credit default swaps are now pricing in the possibility of a default," Scholtz said.

"While a default is still not our base case, we cannot rule out this possibility. We now believe the best-case scenario is that Credit Suisse successfully executes another rights issue to shore up the confidence of wholesale funders and clients."

Adding to the crisis were comments from Saudi National bank chairman Ammar Al Khundairy came out saying he would not invest more funds into the company. The Saudi bank is the biggest backer of Credit Suisse

While it adds to the crisis, it's also in part due to regulations and how much the Saudi National Bank is allowed to own.

Credit Suisse sends shockwaves through world markets

With the falls of Credit Suisse, world markets have quickly been sold off.

In England, the FTSE 100 had its worst day since the start of COVID, falling by 300 points or whipping out more than $AUD130 billion off its market.

But the pain wasn't just felt in England, with most of the European markets also falling between 3 and 4%.

Bank stocks were unsurprisingly worst hit, plunging 7%. In other words they had their worst day since Russia invaded Ukraine.

Australia's ASX 200 was down 2.11% to 6,917 at the time of writing.

Swiss regulators come to the rescue

In an effort to calm the market, the Swiss authorities were quick to come to the rescue.

The Swiss National Bank (SNB) and the Swiss Financial market Supervisory Authority came out with a joint statement highlighting the problems with Credit Suisse have nothing to do with issues for "certain banks" in the US.

The regulators say that the central bank will step in if the situation changes.

They also highlighted that banks are required to be able to absorb the negative effects of major crises.

"Regulators in Switzerland require all banks to maintain capital and liquidity buffers that meet or exceed the minimum requirements of Basel standards," the statement reads.

"Furthermore, systemically important banks have to meet higher capital and liquidity requirements."

What does it mean for you?

In situations like this, the impact varies and will largely come down to what you actually own.

Although in this instance, given the size and importance of Credit Suisse and the collapse of SVB just days earlier, markets are jittery and most sectors will see a sell-off.

When it comes to investors in Australia, our overweight to banks and miners which will add to the impact on our market.

But depending on your goals, this could be seen as a buying opportunity.

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