Bank panic: Credit Suisse in the crosshairs as fear spreads
The sudden panic that engulfed Credit Suisse overnight says something disconcerting about the fragility of the global banking system that has been exposed by the collapse of two globally-insignificant US banks this week.
Credit Suisse’s share price, already ravaged by a string of scandals and heavy losses in recent years, plunged more than 30 per cent at one point. The cost of insuring against a default on its debt via credit default swaps blew out dramatically – even as the value of some of its bonds was slashed to discounts of up to 35 per cent on their face value.
Credit Suisse has seen its share price decimated, falling more than 90 per cent over the past decade.Credit:Bloomberg
The failures of the Silicon Valley and Signature banks in the US earlier this week, which forced the US Federal Reserve Board to take unprecedented actions to protect all US depositors, put an uncomfortable spotlight on the entire banking sector as both the risk-averse and the predatory searched for the next domino that might fall.
Credit Suisse was peculiarly vulnerable.
Its legacy of mistakes, misjudgements and wrongdoing – which range from its exposures to the Archegos and Greensill collapses to money laundering, large-scale leaking of its customers’ data, frauds and regulators’ rebukes for spying on its staff – have seen its share price decimated, falling more than 90 per cent over the past decade.
Only this week, after being questioned by the US Securities and Exchange Commission, the bank disclosed that it had found “material weakness” in its financial reporting control. The engagement with the SEC caused an anxiety-inducing delay in issuing its annual report and came at an awkward moment, given the turmoil in the sector.
Then, on Wednesday, when Ammam Al Khudairy, the chairman of its major shareholder the Saudi National Bank, when asked whether it would be prepared to inject more cash into the group, provided an unequivocal “absolutely not.”
While there are some valid reasons why Saudi National Bank might not want, or be allowed, to increase the 9.9 per cent stake it bought as part of a 4 billion Swiss francs ($6.5 billion) capital raising last year, that was enough to ignite a fresh selloff and a sufficiently charged environment for the Swiss National Bank to declare its willingness to provide liquidity support for the group “if necessary.”
It shouldn’t be necessary. Credit Suisse is a designated globally systemically important bank, subject to stringent capital adequacy and liquidity requirements and intense supervision. It has a common equity tier one capital adequacy ration of 14.1 per cent and a vast hoard of cash and other liquid assets – the equivalent of about $190 billion of liquid assets within a $860 billion balance sheet – to call on.
It does have a substantial exposure to corporate deposits, which tend to be much less stable than retail deposits and which, as was seen in the US bank failures, can make a bank more susceptible to a run. The high levels of liquidity and the willingness of the Swiss central bank to provide a backstop do, however, provide insurance against that possibility.
Moreover, the group weathered massive outflows of funds last year, most of it in the December quarter when customers pulled about $180 billion out of the group. That forced it into a major restructuring that will reduce costs and risk and release significant amounts of capital and cash.
Credit Suisse is not just too big to be allowed to fail but there is, therefore, no obvious reason at this point why it would.
Unlike the Silicon Valley and Signature Banks it doesn’t hold large quantities of government bonds and therefore isn’t sitting on a massive pile of unrealised losses as a result of the surge in global interest rates (and consequent fall in the value of bonds and other fixed rate securities). In any event, systemically important banks mark the value of their holdings to market.
It is the exposure to unrealised losses on bond holdings that, in an environment where central banks are rapidly pushing up interest rates (and pushing down the value of existing bonds) to combat inflation, has made banks more vulnerable to a run.
Ammam Al Khudairy, the chairman of its major shareholder the Saudi National Bank, sparked the sell off when he said the bank would “absolutely not” be willing to inject more into the Swiss giant. Credit:Bloomberg
To generate the liquidity to enable customers to cash out their deposits, they have to sell the bonds and realise those losses on securities that would otherwise be held to maturity without loss. It was a decision – under pressure from mounting redemptions by depositors – to sell $US21 billion of bonds at a $US1.8 billion loss that condemned Silicon Valley Bank.
It was inevitable that, with the Fed raising US rates by 450 basis points within 12 months and other central banks following in behind it, albeit not as aggressively, that the abrupt shift in monetary policies would generate some stresses within the financial system.
It was only last year that the European Union ended its decade-long experiment with negative interest rates (pity those banks still holding those negative yielding bonds today). A year ago the US federal funds rate was almost zero.
There’s been a dramatic and quite abrupt shift in global monetary settings and banks – because the post-financial crisis settings have required them to hold large amounts of unquestionably “safe” securities and therefore have big holdings of low-yielding government bonds – were in the front lines as the tide of monetary policy turned.
The problems exposed in the US banking sector this week have created a febrile environment.
Credit Suisse won’t be the only bank targeted by the fearful or predacious.
Problems large enough and threatening enough to force the Fed to effectively guarantee all the deposits in the US system, while also offering to buy securities from the banks at par (which means the banks won’t crystallise the losses they would experience if they had to sell those securities into the market) would tend to do that.
It isn’t, therefore, surprising that there is an intense search underway for other vulnerable banks. Credit Suisse won’t be the only bank targeted by the fearful or predacious.
That a bank of such global systemic importance could be at risk of being overwhelmed in this intensely risk-averse moment will provide even more food for thought for the central bankers and, with a meeting looming next week, the Fed in particular.
Silicon Valley and Signature shouldn’t have represented a threat to the stability of the US financial system but the Fed’s actions suggest strongly that it believed they did. At what point does prioritising the effort to reduce inflation risk another financial crisis that envelops those institutions of clear systemic importance? Let’s hope we don’t find out.
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