Credit Suisse’s equity lending clients fell amid swings

This content was published on October 5, 2022 – 05:09

October 5, 2022 – 05:09

(Bloomberg) – A Credit Suisse Group AG firm that lends shares has canceled some of those deals in recent days after investors who provided the securities pulled out amid concerns about the bank’s financial health.

The Zurich-based lender told borrowing customers of the stock lending unit that some counterparties had temporarily stopped doing business with it due to increasing market pressure, forcing it to withdraw shares, according to people at the file current. The unit saw less than 5% of the total pool withdrawn, and there was no impact on Credit Suisse funding, one of the people said.

While the bank is only an intermediary in securities lending transactions, several investors who provided the shares asked what risks they were taking with respect to the bank itself, the people said, asking the anonymity to discuss non-public information. Some outflows from securities lending activity have reversed in the past 24 hours and the revenue impact is not material, one said.

Still, the clients’ pullout underscores the urgency surrounding CEO Ulrich Koerner’s plans to fix the bank and regain market confidence after a brutal few years that included billions of dollars in losses at Archegos Capital Management. Credit Suisse shares hit a record high on Monday and the cost of insuring its debt against default hit an all-time high. Both have since recovered. Koerner is due to notify investors on October 27.

“We remain close to our clients as we conduct our strategic review,” said Dominique Gerster, spokesperson for Credit Suisse.

Securities lending is common among investors as it allows them to generate a little extra income from assets that would otherwise sit idle. Borrowers use the securities to place bets on the market without having to buy them – like hedge funds wanting to short a stock – although they usually have to provide some form of collateral.

Credit Suisse’s equity lending business is part of its Global Trading Solutions division, a joint venture between investment banking and wealth management businesses. It is separate from the prime brokerage business, which used the bank’s money to provide services to hedge funds. Credit Suisse exited core business following Archegos losses.

The stock lending business, on the other hand, acts as a trustee for wealth management clients and Swiss institutions, taking a share of the money that stock lenders earn in these transactions. This limits any financial risk to the bank.

In addition, banks and regulators have taken a number of steps since the financial crisis to try to break the link of a lack of market confidence leading to real financial difficulties for banks. Authorities now require banks to hold enough cash and highly liquid assets to cover one month of cash outflows in the event of a severe crisis. Credit Suisse said in July it had nearly double that requirement.

And banks have fewer derivatives transactions these days, forcing them to provide collateral in the event of credit deterioration. A decade ago, Credit Suisse said a two-notch cut by all major ratings companies would force it to shell out 3.6 billion francs. Now the equivalent figure is one-sixth of that.

Yet nervous customers who turn to rivals with deals or clearances weigh on short-term revenue and can take years of effort to win back.

(Add date of restructuring plan to fourth paragraph)

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