Credit Suisse under siege | Financial Times

good morning On Tuesday, we asked if another bank would fall. We think of America, not Europe. But it was Credit Suisse that was teetering. In the early hours of Thursday morning in Switzerland, the bank said it would “pre-emptively” take 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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Our emails: robert.armstrong@ft.com and ethan.wu@ft.com.

Credit Switzerland

When a bank announces at 2 a.m. local time that it’s borrowing from the government, it’s not a good sign. In the U.S. housing crisis and the European sovereign debt crisis that followed, such announcements can cause fear.

But the lesson of Mario Draghi and “whatever it takes” is that the government controls the printing press. A wall of money, properly deployed, can really prevent disaster. It’s a long way to go to write an obituary for Credit Suisse. For all its scandals and mistakes, there was a strong and liquid balance sheet on Wednesday, and a strong brand in wealth management.

As the FT reported, Credit Suisse spent Wednesday afternoon reaching out to the Swiss authorities to request a statement of public confidence. Around 8pm Zurich, the statement came, assuring the market that “if necessary, the [Swiss National Bank] will provide CS liquidity”. That alone, it seems, is not enough. Six hours later, around 2 am, Credit Suisse said

take decisive action to pre-emptively strengthen liquidity with the intention of using options for loans from the Swiss National Bank (SNB) up to CHF 50 billion in Covered Loan Facilities as well as short-term liquidity facilities, which are fully collateralized by high-quality assets

The bank also announced it would buy back SFr3bn ($3.2bn) in “senior debt securities.” This looks like Credit Suisse is signaling to the market that it has the financial capital to buy back distressed debt. The message is: taking liquidity from the SNB is not just a last ditch effort to save the bank; we plan for the future. well this could be true. We will learn more today.

Did the Credit Suisse panic have anything to do with last week’s Silicon Valley Bank failure? The two businesses are very different, and the losses in long-term securities that fatally wounded SVB do not appear to be a problem at Credit Suisse.

But the two crises are related. At some point in every central bank rate hike cycle, things break down and people get scared. Those who are afraid to find a host. SVB is broken, fear is released and Credit Suisse is the softest target.

While Swiss banks’ balance sheets are strong, their reputations are not. A series of scandals, mostly stemming from the shaky executive suite and investment banking unit, have tarnished the brand. The most powerful franchise, wealth management – a business based on reputation – is suffering consequences. Assets under management in the division fell by 27 percent in 2022. Profitability collapsed. Worse, bank deposits went in the same direction, down 37 percent in the fourth quarter.

It is a matter of bank profitability that, in a climate of fear, can be an existential threat.

What could happen next? With the Swiss authorities behind Credit Suisse, it seems unlikely that the lack of liquidity will sink in. This makes the classic bank open much less likely. But while the government can provide liquidity, it cannot provide a business model. Depositors and wealth management clients should see reasons to stay with banks. The FT reported that before the SNB’s liquidity news, JPMorgan analysts thought the situation was getting worse,

the most likely scenario. . . is the sale of the lender to the local competitor UBS. . . The equity injection by the SNB is also likely to allow Credit Suisse to try to fix its own problems by selling a minority stake in the retail bank and using the proceeds to restructure the rest of the group.

However, JPMorgan analysts said it was unlikely that Credit Suisse would fail given the importance of the Swiss economy and Zurich’s status as a global financial center.

We agree that the SNB has the tools to prevent immediate failure, whether caused by a run or otherwise. We also agree that bank structures can look very different in a matter of days or weeks. We do not make predictions. All we know for certain is that there is no return to the status quo ante. (Armstrong & Wu)

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