Now Credit Suisse?

This post has been updated since it was originally published.

Banking

Fig. 1. “East River Savings Bank,” apparently now a CVS drug store. Photograph by Jim Henderson, July 3, 2021, via Wikimedia Commons, CC BY 4.0.

It all begs the question: How did the failure of Silicon Valley Bank, a $212 billion regional bank with a concentrated deposit base, spill over to Credit Suisse and the world’s banking system?

SVB and Credit Suisse don’t seem to have too much in common. Unlike the regional U.S. banks that failed over the weekend, Credit Suisse is a global institution. It had assets worth about 530 billion Swiss Francs ($575 billion) on its balance sheet at the end of 2022—more than double Silicon Valley Bank’s. Credit Suisse is one of two dozen primary dealers with the Federal Reserve. The Bank for International Settlements’ Financial Stability Board considers it a Global Systemically Important Bank—“too big to fail” in colloquial terms. It has investment banking, wealth management, and other business lines on several continents on top of traditional banking.

It also has lots of problems. In recent years, Credit Suisse has been the European banking industry’s sickest member. It suffered major losses on junk bond trades in the mid 2010s, was at the center of the downfalls of Archegos Capital Management and Greensill Capital, and has churned through several CEOs and chairmen, among other issues and scandals. The result was an outflow of more than 110 billion Swiss francs of customer deposits in the fourth quarter alone.^[1]

Remember, these are the folks who feel entitled to assess your creditworthiness. (And yeah, I’m pretty sure I made a similar crack during the 2008 Financial Crisis.)

Credit Suisse’s failings have included a criminal conviction for allowing drug dealers to launder money in Bulgaria, entanglement in a Mozambique corruption case, a spying scandal involving a former employee and an executive and a massive leak of client data to the media. Its association with disgraced financier Lex Greensill and failed New York-based investment firm Archegos Capital Management compounded the sense of an institution that didn’t have a firm grip on its affairs. Many fed up clients have voted with their feet, leading to unprecedented client outflows in late 2022.^[2]

For years, Credit Suisse has been the bad apple of the European banking industry. A series of costly and cack-handed blunders had cost it billions and seen its share price slide almost continuously.

But on Wednesday, what had been a slow-burning mess exploded into an acute crisis that triggered a scramble across City trading floors.

What triggered the panic was two words: “Absolutely not”.

Credit Suisse’s share price plunged as much as 30pc after its biggest investor said it will not stump up any more cash to backstop the struggling bank. Ammar Al Khudairy, chairman of the Saudi National Bank, ruled out any further support, saying there were “many reasons” not to put any more money in. . . .

Nouriel Roubini, an economist known as “Dr Doom”, raised the spectre of a Credit Suisse default becoming a “Lehman moment”.

He told Bloomberg TV: “The problem is that Credit Suisse, by some standards, might be too big to fail, but also too big to be saved.”^[3]

The way Bloomberg spins this, it looks like Credit Suisse should survive, that a significant part of this is an emotional reaction to what happened with Silicon Valley Bank.^[4]

The Wall Street giant, whose failure in 2008 triggered the global financial crisis, succumbed when funding dried up and other banks stopped dealing with it. Unlike Lehman and SVB, Credit Suisse has substantial liquid assets to call upon and access to central bank lending facilities and is less sensitive than many rivals to sharp moves in interest rates. It has rebuilt its cushion against more deposit withdrawals since the worst wave of outflows in October. It also has enough money-like liquid assets to pay back half of all its liabilities in deposits and loans from other banks, according to Bloomberg Opinion banking columnist Paul J. Davies. [Chief Executive Officer Ulrich] Koerner said the firm’s liquidity coverage ratio showed it can handle over a month of heavy outflows in a period of stress.^[5]

One problem here is with economists’ assumption that human beings are rational actors. We really won’t know how the psychology plays until it has played:

Yet as its share price tumbled, Credit Suisse reached out to the Swiss National Bank (SNB) to ask for a public show of support. Late on Wednesday night, it announced it would be borrowing up to $54 billion (£44 billion) from the central bank.

Some in the market believe more radical intervention was inevitable. The City trader said: “It doesn’t look like there’s much Credit Suisse can do from here to change the narrative themselves.

“Investors are eagerly waiting for a potential nationalisation scenario from the SNB to avoid it becoming systemic.”^[6]

Another part of the problem, that Nouriel Roubini alluded to, is Credit Suisse’s size.^[7]

Hendrik du Toit, chief executive of UK asset manager Ninety One, which has a very small holding in the Swiss bank, said: “Sizeable bank failures, unless dealt with firmly, sow the seeds of contagion.

“It is too early to tell whether this will cause further damage [but] Credit Suisse needs to be dealt with.

“Expect volatility to continue.” The Bank of England declined to comment.^[8]

As with [Silicon Valley Bank], customer deposit outflows have been a drag on liquidity at the bank, as have its restructuring costs. Together they are hurting its ability to meet short-term liabilities—even if the overall balance sheet remains well within regulatory capital requirements. It creates the worry that if outflows continue, Credit Suisse could become a forced seller of longer term assets. That’s what brought about SVB’s downfall—many of its assets were sold at a steep loss after a year of Federal Reserve interest-rate increases pushed down the value of bonds on its balance sheet. As with SVB, regulators and governments will be under pressure to save the day and prevent an even greater crisis of confidence or contagion in the global banking system.

“Despite Credit Suisse’s protests, it is looking inevitable that the Swiss National Bank (SNB) will have to intervene and provide a lifeline,” says Octavio Marenzi, CEO at management consultancy Opimas. “The SNB and the Swiss government are fully aware that the failure of Credit Suisse or even any losses by deposit holders would destroy Switzerland’s reputation as a financial centre.”^[9]

It doesn’t look to me like people are reacting to substantial information. It looks to me like people are reacting precisely to what they don’t know, which is to say that they don’t trust what they do know, which is further to say that they don’t trust that what they’re being told is a complete picture.

If you want to fix the psychology, it might help to fix the transparency. Which would be kind of a different way from how the powers that be here are used to doing business.

From here, I get a bit confused:

Late on Wednesday, Credit Suisse (ticker: CS) tried to reassure investors of its financial health by saying it would use the option to borrow as much as 50 billion Swiss francs ($54 billion) from the country’s central bank. To further shore up confidence, it said it would buy up to $2.5 billion of its dollar-denominated bonds, as well as up to $530 million worth of euro-denominated debt. The prices of both had dropped along with Credit Suisse’s share price.

Credit Suisse stock closed down 24% on Wednesday after its largest shareholder, the Saudi National Bank, said it wouldn’t be investing any more money in the lender because it would surpass a regulatory threshold. That sent bank shares falling worldwide. The S&P 500 gave back all its gains for the year so far in the rout.

On Thursday, Saudi National Bank Chairman Ammar Al Khudairy told CNBC the panic over Credit Suisse is “unwarranted.” There haven’t been any discussions with the Swiss bank about providing additional assistance, he said.^[10]

Accessing credit and buying back debt is all straight-forward enough, although I wonder why a bank borrows money it doesn’t apparently need in the first place. What gets me is that having sparked the panic in the first place, Ammar Al Khudairy waited a day to call it unwarranted.^[11]

It’s no wonder folks are panicking. They’re being fed bullshit.

Brian Chappatta, “SVB’s 44-Hour Collapse Was Rooted in Treasury Bets During Pandemic,” Bloomberg, March 10, 2023, https://www.bloomberg.com/news/articles/2023-03-10/svb-spectacularly-fails-after-unthinkable-heresy-becomes-reality

Saleha Mohsin, Lydia Beyoud and Sridhar Natarajan, “FDIC Races to Return Some Uninsured SVB Deposits Monday,” Bloomberg, March 11, 2023, https://www.bloomberg.com/news/articles/2023-03-11/fdic-races-to-start-returning-some-uninsured-svb-deposits-monday

Associated Press, “US government: Silicon Valley Bank clients will get funds,” March 12, 2023, https://apnews.com/article/silicon-valley-bank-bailout-yellen-deposits-failure-94f2185742981daf337c4691bbb9ec1e

William D. Cohan, “SVB’s Valley of Death,” Puck, March 12, 2023, https://puck.news/svbs-valley-of-death/

Ben Foldy, Rachel Louise Ensign, and Justin Baer, “How Silicon Valley Turned on Silicon Valley Bank,” Wall Street Journal, March 12, 2023, https://www.wsj.com/articles/how-silicon-valley-turned-on-silicon-valley-bank-ee293ac9

Victoria Guida and Sam Sutton, “‘There’s going to be more’: How Washington is bracing for bank fallout,” Politico, March 12, 2023, https://www.politico.com/news/2023/03/12/silicon-valley-bank-fallout-washington-00086662

Jeff Stein et al., “U.S. says ‘all’ deposits at failed bank will be available Monday,” Washington Post, March 12, 2023, https://www.washingtonpost.com/us-policy/2023/03/12/silicon-valley-bank-deposits/

Nick Timiraos, “SVB, Signature Bank Depositors to Get All Their Money as Fed Moves to Stem Crisis,” Wall Street Journal, March 12, 2023, https://www.wsj.com/articles/federal-reserve-rolls-out-emergency-measures-to-prevent-banking-crisis-ba4d7f98

Zachary Warmbrodt, “Banks fought to fend off tougher regulation. Then the meltdown came,” Politico, March 12, 2023, https://www.politico.com/news/2023/03/12/banks-regulations-feds-svb-meltdown-00086694

Adam Cancryn, Ben White, and Victoria Guida, “How Biden saved Silicon Valley startups: Inside the 72 hours that transformed U.S. banking,” Politico, March 13, 2023, https://www.politico.com/news/2023/03/13/the-emergency-bank-rescue-that-almost-didnt-happen-72-hours-00086868

John Cassidy, “The Old Policy Issues Behind the New Banking Turmoil,” New Yorker, March 13, 2023, https://www.newyorker.com/news/our-columnists/the-old-policy-issues-behind-the-new-banking-turmoil

Telis Demos, “Were SVB and Signature Bank Just Bailed Out by the U.S. Government?” Wall Street Journal, March 13, 2023, https://www.wsj.com/articles/were-banks-just-bailed-out-by-the-government-6b0a582f

Eric Lutz, “The Silicon Valley Bank Crisis Is Complicated. But Donald Trump’s Role In It Isn’t,” Vanity Fair, March 13, 2023, https://www.vanityfair.com/news/2023/03/silicon-valley-bank-collapse

David J. Lynch and Tony Romm, “Washington’s bank rescue fails to erase all doubts,” Washington Post, March 13, 2023, https://www.washingtonpost.com/us-policy/2023/03/13/silicon-valley-bank-doubts/

Jeff Stein, “Is this a bailout and 6 other questions about the SVB collapse,” Washington Post, March 13, 2023, https://www.washingtonpost.com/us-policy/2023/03/13/svb-bank-bailout-fed/

Zachary D. Carter, “This Bank Panic Should Not Exist,” Vanity Fair, March 14, 2023, https://www.vanityfair.com/news/2023/03/silicon-valley-bank-run-panic-should-not-exist

Myriam Balezou, “Credit Suisse Is In Crisis. What Went Wrong?” Bloomberg, March 15, 2023, https://www.bloomberg.com/news/articles/2023-03-15/credit-suisse-what-s-going-on-and-why-is-cs-stock-falling

William D. Cohan, “Two Days in the Valley,” Puck, March 15, 2023, https://puck.news/two-days-in-the-valley/

Simon Foy, “Is Credit Suisse, the bad apple of European banking, really ‘too big to fail, too big to be saved’?” Telegraph, March 16, 2023, https://www.telegraph.co.uk/business/2023/03/15/credit-suisse-share-price-bailout/

Nicholas Jasinski, “How SVB Triggered Credit Suisse’s Latest Mess—and Sparked Fears of a Financial Crisis,” Barron’s, March 15, 2023, https://www.barrons.com/articles/credit-suisse-svb-banking-crisis-3faac588

Brian Swint, “Credit Suisse Stock Surges as Central Bank Loan and Debt Buybacks Tame Panic,” Barron’s, March 16, 2023, https://www.barrons.com/articles/credit-suisse-buy-back-debt-svb-banks-crisis-bf792d0d

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1. ^[1]Nicholas Jasinski, “How SVB Triggered Credit Suisse’s Latest Mess—and Sparked Fears of a Financial Crisis,” Barron’s, March 15, 2023, https://www.barrons.com/articles/credit-suisse-svb-banking-crisis-3faac588↩
2. ^[2]Myriam Balezou, “Credit Suisse Is In Crisis. What Went Wrong?” Bloomberg, March 15, 2023, https://www.bloomberg.com/news/articles/2023-03-15/credit-suisse-what-s-going-on-and-why-is-cs-stock-falling↩
3. ^[3]Simon Foy, “Is Credit Suisse, the bad apple of European banking, really ‘too big to fail, too big to be saved’?” Telegraph, March 16, 2023, https://www.telegraph.co.uk/business/2023/03/15/credit-suisse-share-price-bailout/↩
4. ^[4]Myriam Balezou, “Credit Suisse Is In Crisis. What Went Wrong?” Bloomberg, March 15, 2023, https://www.bloomberg.com/news/articles/2023-03-15/credit-suisse-what-s-going-on-and-why-is-cs-stock-falling↩
5. ^[5]Myriam Balezou, “Credit Suisse Is In Crisis. What Went Wrong?” Bloomberg, March 15, 2023, https://www.bloomberg.com/news/articles/2023-03-15/credit-suisse-what-s-going-on-and-why-is-cs-stock-falling↩
6. ^[6]Simon Foy, “Is Credit Suisse, the bad apple of European banking, really ‘too big to fail, too big to be saved’?” Telegraph, March 16, 2023, https://www.telegraph.co.uk/business/2023/03/15/credit-suisse-share-price-bailout/↩
7. ^[7]Simon Foy, “Is Credit Suisse, the bad apple of European banking, really ‘too big to fail, too big to be saved’?” Telegraph, March 16, 2023, https://www.telegraph.co.uk/business/2023/03/15/credit-suisse-share-price-bailout/↩
8. ^[8]Simon Foy, “Is Credit Suisse, the bad apple of European banking, really ‘too big to fail, too big to be saved’?” Telegraph, March 16, 2023, https://www.telegraph.co.uk/business/2023/03/15/credit-suisse-share-price-bailout/↩
9. ^[9]Nicholas Jasinski, “How SVB Triggered Credit Suisse’s Latest Mess—and Sparked Fears of a Financial Crisis,” Barron’s, March 15, 2023, https://www.barrons.com/articles/credit-suisse-svb-banking-crisis-3faac588↩
10. ^[10]Brian Swint, “Credit Suisse Stock Surges as Central Bank Loan and Debt Buybacks Tame Panic,” Barron’s, March 16, 2023, https://www.barrons.com/articles/credit-suisse-buy-back-debt-svb-banks-crisis-bf792d0d↩
11. ^[11]Brian Swint, “Credit Suisse Stock Surges as Central Bank Loan and Debt Buybacks Tame Panic,” Barron’s, March 16, 2023, https://www.barrons.com/articles/credit-suisse-buy-back-debt-svb-banks-crisis-bf792d0d↩