No, Credit Suisse Won’t See A ‘Lehman-Style Explosion’—Here’s Why

Concerns about the financial health of Credit Suisse over the weekend have led to fresh market fears of another Lehman Brothers collapse. Credit Suisse's shares plunged to new lows on Monday and the cost of insuring the bank against default spiked to its highest level in more than two decades, as rumors swirled that the bank's capital position is in danger.

Credit Suisse's shares plummeted to a new low of $3.70 per share on Monday before recovering to $4 per share by the end of the day. The stock is on track for its biggest annual drop in the firm's history.

Credit Suisse's credit default swaps, which offer protection against default, surged on Monday, but experts don't think the bank will fail. Despite whispers of another Lehman Brothers moment, most Wall Street experts don't think it will happen.

James Angel, finance professor at Georgetown University's McDonough School of Business, said that the world is in a different place than it was in 2008. There are pained realizations in markets today, but there is no big systemic issue that is affecting everyone like it was in 2008.

Banks face much stricter regulatory supervision today than they did during the financial crisis, with rigorous stress tests to ensure they meet capital requirements. The market is in a "cockroach mentality" where investors believe if there is one bank with riskier capital levels then there are more.

Credit Suisse is trapped in a loop of doom where bad news causes the stock to fall and the credit default swaps to rise. We don't think there will be a Lehman Moment, but investors shouldn't rush out to buy shares.

If the Swiss banking giant has to file for Chapter 11 it would be the worst-case scenario. An event like this would have a negative effect on the rest of the financial system. The bank would have to reach a point where it is unable to fund its assets in the future. The firm would be forced to raise money at a lower rate or borrow from a central bank.

Distressed financial institutions try to fix capital ratios by selling assets or merging with another institution. The Swiss central bank stepped in with emergency funding for the likes ofUBS in 2008 in order to avoid a bankruptcy.

Credit Suisse's situation appears to be more company-specific, where the bank has made mistakes with scandals in the past and is now paying the price for it.

Credit Suisse's current situation is similar to that ofDeutsche Bank in 2016 when the bank faced similar concerns about cash flow. Credit default swaps surged higher, the debt rating of the firm was lowered, and some clients stopped doing business with the firm because of the federal probe. The bank raised nearly $8 billion in new capital after reaching a smaller settlement fee than anticipated.

The CEO of Credit Suisse said in a memo over the weekend that the bank is at a "critical moment" in its restructuring efforts, though he urged employees not to confuse the company's "day to day stock price performance with the strong capital base and liquidity position." An update on the firm's business will precede its third quarter earnings release on October 27.

Credit Suisse's restructuring plans are estimated to cost around $4 billion by analysts at two different banks.

Citigroup analysts led by Andrew Coombs wrote on Monday that Credit Suisse shares are now a "BUY for the brave." There is significant execution risk from the firm's new strategic plan and markets are pricing in a highly dilutive capital raise, though they don't believe this is another "2008" moment Credit Suisse's financial results from the most recent quarter were used to argue in a note on Monday.