Credit Suisse Spirals As Bank Crisis Threatens To Claim A SIFI

I’m the last person to yell “Fire!” in a crowded theater.

I’m also instinctually averse to hyperbole for the sake of it. Longtime readers might fairly note that I regularly trafficked in various sorts of bombast during my earliest days writing for public consumption, but anyone who took the time to actually read the articles quickly discovered that most of my embellishment was tongue-in-cheek.

With those caveats, let me say unequivocally that if Credit Suisse were to run into any real trouble, let alone fail, that’d be bad. And, as discussed at some length first thing Wednesday morning, the current bout of angst plaguing the embattled Swiss mainstay feels considerably more ominous than the social media-fueled speculation that triggered outflows in October.

Read more: Let’s Hope We Don’t Have To Worry About Credit Suisse

The shares closed at a record low Wednesday after the Saudis emphatically dispensed with the idea of upping their stake.

The soundbites from Saudi National Bank Chairman Ammar Al Khudairy were the proximate cause of the rout, but in my view, an FT report which suggested Credit Suisse asked the SNB and Finma for public statements of support was even more disconcerting.

If true, the bank thinks sentiment is so poor that absent government assurances, the market could push things to the brink — or beyond.

As one analyst told the FT, SNB intervention, verbal or otherwise, now looks “inevitable.”

The Swiss can’t afford for Credit Suisse to fail, and the reputational damage from any depositor losses would be catastrophic given Switzerland’s storied history as a safe haven for wealth.

I think it’s fair to say this isn’t a drill. The ECB reportedly contacted lenders to check their exposure to Credit Suisse, and according to the same linked FT piece, Christine Lagarde considered issuing a statement, but decided against it because it might’ve made things even worse.

This raises the stakes for Thursday’s ECB meeting, and materially so. It’d be risky to go ahead with the planned 50bps rate hike, but it’d also be risky not to given that the ECB pre-committed to the move last month. Lagarde will face very tough questions either way, and many of those questions will relate specifically to Credit Suisse.

Meanwhile, Janet Yellen and friends were “actively reviewing” US banks’ exposure, according to Bloomberg’s sources, who said US government officials “are working closely with European regulators” on the matter. “Treasury is monitoring this situation and has been in touch with global counterparts,” a US government spokesperson told FT.

Plainly, the widening in one-year CDS (and the attendant deep inversion of Credit Suisse’s CDS curve) was indicative of counterparty unease. The problems at Credit Suisse are the furthest thing from new, so banks have surely hedged their exposure on a rolling basis, but those hedging needs are now considerably more acute.

Out of four people I spoke to Wednesday, nobody evidenced a sense of panic, but as more than a few commentators were keen to emphasize, Credit Suisse isn’t SVB. A meltdown in Zurich would be a serious event, even if it “doesn’t look like anything resembling 2008” yet, as someone at another SIFI told me on Wednesday afternoon.

The bank’s dollar bonds plunged as much as 40 cents. “Credit Suisse has about $20 billion of bonds in the US high-grade index — much of it trading like distressed junk,” as Bloomberg’s James Crombie indelicately put it. The drop in the stock was the largest decline ever and volume, at 280 million, was a record.


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7 thoughts on “Credit Suisse Spirals As Bank Crisis Threatens To Claim A SIFI

  1. Oh waiting for the talking heads to admit they were a little bit aggressive about their Fed forecasts and just a wee bit arrogant and full of themselves…. thinking about 2 Bloomberg contributors in particular.

  2. They can’t let it go under ans everybody knows the GreatFinancialCrisis playbook (heck the Fed made up some new rules “only for a year”).
    Investment wise, game theory says right now to be in cash and very soon decide which pieces you want to pick up (Warren Buffet’s $100B+ war chest might finally see some action in the next month ir two).

    Sadly I fear that enough fear will make the long planned recession finally show up (companies slowing hiring, consumers slowing spending) to the party and hit Main Street the hardest.

  3. CS has shrunk a lot in recent years. Deposits are $252BN (down -42% in a year!) which is only half again as much as SIVB’s deposits were at the start of 2023. Assets are $574BN, of which $74 cash, $137 securities (likely carried at fair value), and $286BN loans. I’m not clear why depositors would be at major risk. Shareholders are scarcely relevant at market cap <$10BN. Bondholders are owed $140BN, but high yield investors know the score. Counterparties, though, are probably a different story and maybe The Story. Off to pore over CS’s disclosures.

    1. Since the SNB has backstopped CS’ liquidity, and CS’ balance sheet looks fine (maybe I’m naive, but it does), where’s the beef?

  4. I don’t remember anything that you wrote that I would have classified as “bombastic”- have you honestly ever written without meaning? I admit that I am unsure of when and where your earliest days of writing for public consumption actually occurred. I started tagging along during your SA days 🙂

    Well, if we have learned this week that governments will absolutely backstop banks, why not Microsoft, Google, Apple, etc.? I do love Japan and most things Japanese!

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