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good morning On Tuesday, we asked if another bank would fall. We were thinking about America, not Europe. Yet it is Credit Suisse that is teetering. In the early hours of Thursday morning in Switzerland, the bank said it would “advance” up to SFr50bn ($54bn) from the Swiss central bank’s just-announced liquidity backstop. The global banking system is, suddenly, in play.
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Credit Suisse
When a bank announces at 2 am local time that it is borrowing from the government, it is not a good sign. In both the US housing crisis and the European sovereign debt crisis that followed, such announcements were likely to stoke fear to calm it.
Yet the lesson of Mario Draghi and “whatever it takes” is that the government controls the printing press. A money wall, if properly deployed, can avert disaster altogether. So it is too early to write an obituary for Credit Suisse. For all its scandals and missteps, it had a strong and liquid balance sheet as of Wednesday, and a strong brand in wealth management to go with it.
As the FT reported, Credit Suisse spent Wednesday afternoon seeking a public statement of confidence from Swiss authorities. Around 8pm Zurich time, the statement came, assuring the markets that “if necessary, the [Swiss National Bank] will provide liquidity to CS.” That alone, it seems, was not enough. Six hours later, around 2am, Credit Suisse said it was
It is taking decisive steps to strengthen its liquidity in advance with the intention of exercising its option to borrow up to 50 billion under a covered loan facility from the Swiss National Bank (SNB) as well as a short-term liquidity facility, which is fully collateralized. By high quality assets
The bank also announced it would buy back SFr3bn ($3.2bn) in “senior debt securities”. This looks to us like Credit Suisse is signaling to the markets that it has the financial means to buy back its distressed debt. The message is: taking liquidity from the SNB is not a last-ditch effort to save the bank; We are planning for the future. This well may prove to be true. Today we will know more.
Is the Credit Suisse panic related to last week’s Silicon Valley bank failure? The two businesses are highly differentiated, and the losses on long-dated securities that fatally wounded SVB do not appear to be a problem at Credit Suisse.
Yet the two crises are intertwined. At some point in every central bank rate-hike cycle, things break and people get scared. That fear finds a host. SVB collapsed, fear was unleashed and Credit Suisse was the softest target.
While the Swiss bank’s balance sheet was strong, its reputation was not. A series of scandals, most of them stemming from his executive suite and his floundering investment banking unit, left the brand in tatters. Its strongest franchise, wealth management – a business based on reputation – suffered the consequences. Assets under management in that division fell by 27 percent in 2022. Profitability crashed. Worse, bank deposits went in the same direction, falling 37 percent in the fourth quarter alone.
Thus a bank’s profitability problem, in a climate of fear, can turn into an existential threat.
What could happen next? With Swiss authorities standing behind Credit Suisse, a liquidity crunch seems unlikely to sink it. This makes it very unlikely to run a classic bank. But while the government can provide liquidity, it cannot provide the business model. Depositors and wealth management clients have to see a reason to stay with the bank. The FT reports that before the news of the SNB’s liquidity backstop, JPMorgan analysts thought the situation should worsen,
The most likely scenario. . . There is a sale of the lender to local rival UBS. . . An equity injection by the SNB is also a possibility as it allows Credit Suisse to try to solve its own problems by selling a minority stake in its retail bank and using the proceeds to restructure the rest of the group.
However, analysts at JPMorgan said Credit Suisse was unlikely to be allowed to fail because of its importance to the Swiss economy and Zurich’s position as a global financial center.
We agree that the SNB has the tools to prevent an immediate failure, whether due to a run or something else. We also agree that a bank’s structure can look very different in days or weeks. We make no predictions. All we know is that there is no going back to the status quo. (Armstrong and Wu)
A good read
What did the boys see? Andrew Tate.
