In a financial crisis, things move fast.
Credit Suisse has long been telling us that it is a rock solid institution, with a common equity tier 1 ratio of 14.1% at the end of 2022, a liquidity coverage ratio of 150% as on March 14 2023, minimal exposure to interest rate risk through government bond holdings and a largely collateralized loan book against which it has taken just 8bp of loan loss provisions on average across its large wealth management business and the Swiss bank.
But none of that mattered yesterday as confidence in the bank evaporated, spreading fears across the European banking market of a new run gathering pace, following the failure of Silicon Valley Bank.
The Swiss lender has been forced to turn to the central bank for help, announcing overnight that it intends to exercise its option to borrow from the Swiss National Bank (SNB) up to SFr50 billion ($54 billion) under a covered loan facility as well as a short-term liquidity facility, which are fully collateralized by its high-quality assets.
This stopped being about finance over the weekend. It is now about emotion.
In a rational world, support from the central bank might bring down those soaring CDS spreads and restore customer confidence. But Credit Suisse was always able to raise funding from the market against high quality collateral. It has been telling us that it has plenty of liquidity and that is correct.
What it has run out of is trust and credibility.
Does a credit line from the central bank save you when some crypto trader is telling all his followers on Twitter that you are insolvent because he hears that Saudi’s Arabia has run out of financial assistants?
That’s the quality of financial analysis behind much of the collapse in Credit Suisse’s stocks and bonds since the failure of SVB. But this stopped being about finance over the weekend. It is now about emotion.
What would be useful to know is: how much of the Swiss bank’s deposits have run in the last week; is there any sign of them now coming back and are they all now essentially state-guaranteed?
Without knowing that, it is possible to see a SFr50 billion credit line secured against HQLA more as indicating the size of the hole Credit Suisse is in than any assurance that it can clamber its way out.
Credit Suisse probably isn’t going to tell us about recent deposit flows, which we know can move very rapidly and in huge volumes. Even if it did, unfortunately it would be naïve to believe the bank.
In early December 2022, chairman Axel Lehmann told the Financial Times that the storm of withdrawals that hit Credit Suisse in October 2022 – the last time its CDS spreads widened on rumours that it might fail – had flattened across the group and started to reverse in the Swiss business.
Words are such tricky things.
Some SFr64 billion had been pulled from the bank, mostly in October but then continuing into November. At the start of December, after Credit Suisse had completed a SFr4 billion capital raise, the FT quoted Lehmann saying: “I have anecdotes from clients and I know that the money will certainly come back over time.”
Clients might well have been telling him that. But on February 9 2023, when the bank reported its full year results, it turned out that money hadn’t been coming back. More had left.
The wealth management business alone lost SFr92.7 billion in the fourth quarter of 2022; the Swiss Bank another SFr8 billion and, for good measure, the asset management business shed SFr 12 billion of client assets.
Did Lehmann set out to mislead the market, or did he just want to believe that the bank had put the worst behind it by resorting once again to its long-suffering shareholders?
it is possible to see a SFr50 billion credit line secured against HQLA more as indicating the size of the hole Credit Suisse is in than assurance that it can clamber its way out.
Amit Goel, analyst at Barclays, was clearly surprised, noting: “The group had already pre-announced a CHF1.5bn pretax loss for the quarter, but the results were still worse than our expectations, with far larger outflows in wealth management.”
The Swiss Financial Market Supervisory Authority (FINMA) reviewed Lehmann’s remarks. But on March 10, Credit Suisse reported that FINMA “did not see any reason to open a regulatory proceeding”.
Credit Suisse has got into an unfortunate habit recently of claiming some kind of victory from investigations into its legion past misdeeds finally ending, or in this case not beginning.
It doesn’t seem to realize how each one chips away at what little is left of its threadbare credibility. And let’s not even get into the recent delay in publishing its annual report following a late phone call from the SEC and the admission of discovering material weaknesses in its financial reporting controls.
When the definitive history is written – over the weekend perhaps – that FT interview may come to be seen as a tipping point. Because with investors now jumping at shadows, the bank’s assurances have little more credibility than some crypto ninja's assertions based on all those months of experience as a trader since his 17th birthday buying bitcoin and NFTs of bored apes.
Are customers going to be reassured because Credit Suisse is having another try at the old Deutsche Bank trick of offering to buy back bonds that have fallen to steep discounts as some kind of demonstration of its supposed strength. Bondholders will have to decide if those bonds trading like junk might head back to par rather quickly, given that Credit Suisse is now clearly a contingent liability of the sovereign,
Customers that went into its Greensill funds might suggest an alternative use for that SFr3 billion it has suddenly discovered down the back of the sofa.
Does the bank limp along a while longer trying to fix its loss-making wealth management and investment banking businesses, or will it have to be broken up, acquired, or nationalized?
We may know more by the end of the day. But that possibility was certainly implied in the statement last night by FINMA and the Swiss National Bank that they are “in close contact with the Federal Department of Finance to ensure financial stability”.
The global financial system is immense, complicated, interconnected and fragile, especially right now. Credit Suisse’s market capitalization may have fallen below SFr9 billion yesterday, but this is a bank with a SFr530 billion balance sheet as at the end of 2022.
Allowing a G-SIB bank to fail would be like letting a small nuclear bomb go off in the middle of a global banking system that is already teetering.
It can’t be allowed to happen. Don’t take our word for it. That’s what the crypto bros say.
