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Credit Suisse: Should you be concerned?


Should you be concerned about the stability of your own bank now that problems are spilling over to Europe? Just a few days after the bankruptcy of Silicon Valley Bank, Credit Suisse's shares went into free fall. Will the Swiss bank drag other European banks along? Are we heading for a new banking crisis? And is your bank threatening to falter too?

What happened to Credit Suisse?

Not much news really. The bank has been in bad shape for years. Credit Suisse is basically a zombie bank, just waiting for its demise. Now, in itself Credit Suisse is not worth that much. The stock is down a quarter. It is still worth another nine billion Swiss francs. The few billion lost is nothing compared to the stock market value that went off at other European banks.

Will Credit Suisse's problems lead to a collapse?

The bank does everything that is wrong with banking. Credit Suisse pays its top bankers' bonuses up front. Normally you get a bonus at the end of the year if you have performed well. In Europe, those bonuses are also limited. At Credit Suisse they pay the bonuses in advance, because otherwise their top bankers will leave. The bank has actually been on the verge of collapse for some time now.

Should we expect a snowball effect? 

That is now feared. The confidence is gone. The financial system works as long as there is trust in financial institutions, such as the banks. If that disappears at some point, companies and people who have a lot of money with Credit Suisse, will liquidate their account. This can cause problems. In September 2008, Lehman Brothers was dropped. Because that couldn't hurt, they thought, because they didn't work with savings money. They made a serious miscalculation.

People have learned from Lehmann. Bankruptcy can lead to very big problems. The central banks - in Europe - are much more cautious now. They don't dare let a big bank go bankrupt. That is a pity, because in the end we all pay the bill, but it does prevent the dominoes from falling over.

A second good thing is that the regulations have become much stricter. For example, there is the demand from central banks to hold more capital and pay fewer dividends. And don't be too generous with credits. In principle, you do not get a 30-year mortgage in Europe. All such measures since 2008 have ensured that the capital of European banks has been significantly strengthened.

Should you be concerned about the stability of your own bank?

No. Your bank is strictly checked. It would be different if there is a recession and companies go bankrupt. But the number of bankruptcies is still very low. European banks are not stupid like Silicon Valley Bank and Credit Suisse to extend credit to companies that have never turned a profit. Credit Suisse finances everything that is not allowed. In principle, a European bank does not do that and is much stronger than Credit Suisse.

What do you do best as an investor?

We have seen in recent days that the stock market sometimes falls very hard, but also rises again. The worst days alternate with the best. You should not panic sell at the lowest level. You need to revisit your investment strategy and make sure that the vast majority of your investments is in solid companies. You shouldn't be afraid. Don't get excited. It is always possible that the markets will fall for months but then again you can buy cheaper every month. 

How do you see the stock markets evolving in the coming days?

We don't know, Warren Buffett doesn't know, nobody knows. On the positive side, interest rate hikes are over. We all assumed that interest rates would rise. That will hardly ever happen. For companies that have debt, that's good. This is also good for governments. The year had started way too well. In six weeks' time we had an annual return in the stock market. Then it makes sense for the stock market to go down. Now that is Credit Suisse. But even without Credit Suisse there would have been another reason.

For the very best advice when it comes to your finances, call on Expat Beleggen.

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