Banks that trade with Credit Suisse Group moved to safeguard their finances on Wednesday, snapping up contracts that will compensate them if the crisis rocking the Swiss lender deepens.
So frantic was the demand for the contracts, known as credit-default swaps, that they spiked to levels that signal Credit Suisse is in deep financial distress — something unseen at a major global bank since the throes of the 2008 crisis. At least one bank, BNP Paribas, went a step further and informed clients it will no longer accept requests to take over their derivatives contracts when Credit Suisse is the counterparty — a process called novation — according to people familiar with the matter.
The developments reveal growing concern over possible contagion stemming from the crisis at the Swiss lender and the extent to which global banks are going to shield themselves from any potential fallout. Still, there's little sign of widespread distress so far. For months now, the biggest U.S. banks have have been whittling their direct exposure to Credit Suisse, likely limiting the extent of the pain.
"The trading levels have become somewhat a crisis in confidence in Credit Suisse," said Mark Heppenstall, president of Penn Mutual Asset Management. "People are looking for any way possible to get protection."
Switzerland's second-largest lender has been pummeled over the last several years by blowups, scandals, leadership changes and legal issues. Its stock plummeted Wednesday after its biggest shareholder ruled out increasing a stake because of regulatory constraints.
Switzerland's central bank and financial regulator said that Credit Suisse will receive a liquidity backstop if needed, in an effort to arrest the slump in confidence around the troubled lender.
—With assistance from Hannah Levitt and Eliza Ronalds-Hannon.
