Summers: Likely an ‘Element of Contagion’ in Credit Suisse Issues, I’m Increasingly Worried about Financial Stability Problem

During an interview with Bloomberg on Wednesday, Harvard Professor, economist, Director of the National Economic Council under President Barack Obama, and Treasury Secretary under President Bill Clinton Larry Summers argued that there is “probably an element of contagion” in Credit Suisse’s problems and stated that he’s more concerned about a financial stability problem than he was two days ago.

Summers said, “Credit Suisse has had profound issues for a long time. It had a whole set of reversals, and so there[‘s] probably an element of contagion in this, but I think a larger part is just multiple problems coming together in a stream, and that’s certainly a complex and difficult situation. In many ways, a much more complicated one than SVB, because Credit Suisse has complex global operations, there are multiple jurisdictions of regulation that are involved in dealing with it. So, that’s clearly something that is going to require attention. And I would assume that the regulatory authorities are in consultation with each other, in consultation with management about the way forward with respect to the Credit Suisse situation, which certainly appears to have affected the valuations of major institutions globally and appears to be impacting significantly expectations of the future path of interest rate policy.”

Host David Westin then asked, “But do we have a financial stability problem at this point? Are you more concerned about that today than you were 48 hours ago?”

Summers responded, “Yes. I think that, as more and more companies are caught up in this, the complexity and extent of the solutions that are required goes up. Look, this is the kind of thing that the authorities have been planning for since 2008. That’s what orderly resolution and all of that is about. That’s what capital that can be bailed in is about. That’s what larger quantities of capital and liquidity requirements are about. And in a sense, we’re facing the first tests of the new regime, and the new regime didn’t do so well with respect to SVB, in the sense that it was necessary to ad hoc a whole set of new arrangements on top of the new regime, and we’re going to have to see what works out at Credit Suisse.”

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