Credit Suisse Under Siege | financial times

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Good morning On Tuesday we asked if another bank would fall. We thought of America, not Europe. But it is Credit Suisse that is faltering. In the early hours of Thursday in Switzerland, the bank said it would “preemptively” borrow up to SFr50 billion ($54 billion) from the Swiss central bank’s just-announced liquidity backstop. The global banking system is suddenly in play.

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When a bank announces at 2 a.m. local time that it is taking out loans from the state, that is not a good sign. Both in the US real estate crisis and in the European sovereign debt crisis that followed, announcements like these were just as likely to stir up fears as to calm them.

But the lesson of Mario Draghi and whatever it takes is that the government controls the printing press. A properly deployed wall of money can absolutely avert disaster. So it’s far too early to write an obituary for Credit Suisse. Despite all the scandals and mistakes, on Wednesday it had a strong and liquid balance sheet and a strong asset management brand.

As the FT reported, Credit Suisse contacted the Swiss authorities on Wednesday afternoon to request a public vote of confidence. The statement came out around 8pm Zurich time, assuring markets that “if necessary, the [Swiss National Bank] will provide liquidity to CS”. That alone, it seems, wasn’t enough. Six hours later, around 2 a.m., Credit Suisse said that was the case

take decisive action to pre-emptively strengthen its liquidity by intending to exercise its option to borrow up to CHF 50 billion from the Swiss National Bank (SNB) under a secured credit facility and a short-term liquidity facility fully collateralised by high quality assets

The bank also announced it would buy back “senior debt” for SFr3 billion (US$3.2 billion). This looks to us like Credit Suisse is signaling markets that it has the financial resources to buy back its troubled debt. The message is: withdrawing liquidity from the SNB is not just a last-ditch effort to bail out the bank; We plan for the future. This well could turn out to be true. We’ll learn more today.

Is Credit Suisse’s panic related to last week’s failure of Silicon Valley Bank? The two deals are very different, and the losses on long-dated securities that killed SVB don’t appear to be a problem at Credit Suisse.

But the two crises are linked. At some point in every central bank rate hike cycle, something breaks and people get scared. This fear is looking for a host. SVB collapsed, fear was unleashed and Credit Suisse was the softest target.

While the Swiss bank’s balance sheet was solid, its reputation was not. A series of scandals, most of which emanate from the boardroom and the shaky investment banking unit, have attacked the brand. Its strongest franchise, wealth management — a reputation-based business — suffered the consequences. Assets under management in this area fell by 27 percent in 2022. Profitability plummeted. Worse, the bank’s deposits went in the same direction, falling 37 percent in the fourth quarter alone.

A bank’s profitability problem can become an existential threat in a climate of fear.

What could happen next? With the Swiss authorities behind Credit Suisse, it seems highly unlikely that a liquidity squeeze will bring it down. This makes a classic bank run much less likely. A government can provide liquidity, but not a business model. Depositors and wealth management clients need to see a reason to stay with the bank. The FT reports that prior to announcing the SNB’s liquidity backstop, analysts at JPMorgan thought that if the situation worsened,

the most likely scenario. . . is a sale by the lender to local competitor UBS. . . A capital injection by the SNB is also possible, as is the possibility that Credit Suisse is trying to solve its own problems by selling a minority stake in its retail bank and using the proceeds to restructure the rest of the group.

However, analysts at JPMorgan said it was unlikely Credit Suisse would fail because of its importance to the Swiss economy and Zurich’s status as a global financial hub.

We agree that the SNB has the tools to prevent an instant failure, whether caused by a run or something else. We also agree that the structure of the bank could look very different in a few days or weeks. We don’t make predictions. The only thing that is certain is that there is no going back to the status quo ante. (Armstrong & Wu)

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