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New Credit Crisis? What This Bank's Stock Is Telling Markets

John Melloy
May 14, 2012

Shares of Credit Suisse fell below levels the multinational banking giant hit during the U.S. housing crisis, signaling an even deeper and broader credit crisis may be awaiting global markets, many investors said.

Credit Suisse, the second-largest Swiss bank, with offices in 46 countries, plunged  nearly 10 percent in U.S. trading Thursday to below the $18 level hit in 2008 and then again in 2009.

“Most market participants I talk to continue to underestimate the importance of the European banking system to global asset markets,” said Enis Taner, global macro editor at RiskReversal.com. “European bank balance sheets are more than twice the size of U.S. bank balance sheets and given that the current crisis in Europe is at its root a banking crisis, the situation is potentially more concerning than 2008.”

Credit Suisse was the outlier Thursday as the U.S. financial sector and the U.S. stock market gained ahead of crucial Greek elections this weekend.

The markets are anticipating a win by the pro-bailout party in Greece this Sunday and then an announcement in the near future of a bigger rescue plan for the euro with the full backing of Germany.

But Credit Suisse’s price action may be signaling that a solution to the crisis may not be as easy to come by, especially as the amount of debt in the region, and cost of that debt, rises.

The specific reason for Thursday’s plunge was a call by the Swiss central bank for Credit Suisse, which has 2 million private banking clients worldwide, to increase its capital position.

The central bank’s demand implies a capital shortage of about 11.5 billion Swiss francs ($12 billion) for Credit Suisse and and an eight billion Swiss franc ($8.4 billion) shortfall for UBS, "which needs to be filled in the coming seven years,” wrote Dirk Becker, an analyst for Kepler Capital Markets, in a note to clients.

“The long deadline and the strong profitability of both banks should allow these capital gaps to be filled organically," Becker added, "but the SNB is getting nervous about the Euro crisis and the deepening recession and wants its banks to protect themselves against possible market dislocations.”

The Financial Select SPDR ETF, which contains the biggest U.S. banking institutions, has more than doubled since its post-Lehman Brothers collapse low reached in early 2009.

While Credit Suisse is certainly more entwined in this nearby crisis, that doesn’t mean U.S. banks can stay immune if the global financial system locks up and raises the cost of funding for everyone, traders said.

“There is another huge leg down coming in the U.S. financials,” said Peter Schiff, CEO and Chief Global Strategist of Euro Pacific Capital. “In fact, once U.S interest rates rise similar to what is happening in Europe, the fallout for the banks will be worse than 2008.”

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