The cost of insuring Credit Suisse loans dwarfs those of other banks

The cost of buying default insurance from Credit Suisse rose to a record high this week, a sign of growing jitters about the lender’s financial position after the collapse of two US banks sent shockwaves through global markets.

While Credit Suisse stock and bond prices have soared in recent days, the price of bank-linked credit default swaps (CDS) — derivatives that act like insurance and pay off when a company goes up renounced his loans – skyrocketed. The Swiss bank’s five-year US dollar CDS is now above 1,000 basis points – up from less than 400 basis points in early March – with similar moves for euro-based contracts.

This escalation in default insurance prices follows a series of setbacks that have weighed on Credit Suisse’s equity and debt, leading to the group approaching the Swiss National Bank on Wednesday for a 50 billion dollar loan.

Line chart of five-year US dollar CDS prices (basis points) showing that Credit Suisse CDS prices have risen well above those of other banks

“With [Credit Suisse], it’s been headline after headline for most of the past five years,” said John McClain, portfolio manager at Brandywine Global Investment Management. “Here goes one thing at a time.”

Recent moves in Credit Suisse CDS also follow the failures of US lenders Silicon Valley Bank and Signature. The rating agency Moody lowered its outlook for the entire US banking system from “stable” to “negative” on Tuesday due to the “rapid deterioration in the operating environment”.

CDS prices also rose at other big banks, but moves are dwarfed by moves in Credit Suisse contracts. Five-year dollar CDS for US lender JPMorgan gained 15 basis points to hit 94 basis points in the week to Thursday, according to Bloomberg data. The same CDS measure for Citi rose about 20 basis points to 113 basis points.

Five-year euro CDS from Deutsche Bank, one of Credit Suisse’s European competitors, which has faced its own strains in recent years, rose more sharply in price, rising more than 70 basis points to over 160 basis points.

“The recent collapse of two U.S. banks has caused investors to become much more cautious in the sector and scrutinize ‘problem’ banks even more closely,” wrote Joost Beaumont, ABN Amro’s head of banking research, this week referring to the “CS situation as a special case” and not a sign of “general weakness in the banking sector”.

Beaumont added that the “special case” argument was reflected in other banks’ bond spreads, which widened less than Credit Suisse’s, citing the yield gap between bank bonds and less risky government bonds.

Single company CDS are often traded very thinly, which helps to exaggerate market moves. Broadly speaking, “When a company is under stress, their CDS comes under significant pressure, but it’s compounded by the fact that it’s a very, very flat market.” said a bank credit analyst at a major US wealth manager. The cost of insuring Credit Suisse loans dwarfs those of other banks

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