To The Moon

What happened to Credit Suisse?

On March 9, Credit Suisse announced that it had received technical inquiries from the SEC regarding its previously disclosed revisions to its consolidated cash flow statements for 2020 and 2019, and therefore delayed the release of its 2022 annual report.

On March 14, Credit Suisse said it had identified “material weaknesses” in its internal controls over financial reporting for 2021 and 2022, and received an adverse opinion from its auditors. Credit Suisse’s share price fell by 24% on March 15, while its five-year CDS rose to nearly 1000, higher than Deutsche Bank’s crisis in 2016 and the eurozone debt crisis in 2013. This was mainly due to investor concerns about Credit Suisse and its potential adverse consequences.

Credit default swaps (CDS) are credit risk derivatives that can be understood as “default insurance” for bonds, allowing investors to transfer or hedge credit risk. The buyer of a CDS pays a periodic fee to the seller in exchange for protection against losses if the bond issuer or borrower defaults.

CDS rise usually reflects a deterioration in market assessment of the creditworthiness of bond issuers or borrowers, implying an increased probability of default.

How is Credit Suisse’s liquidity situation?

As at year-end 2022, Credit Suisse had CHF245bn in deposits, split CHF166bn in Switzerland and CHF79bn outside of Switzerland. This represents a CHF167bn decline (-40% y/y), including CHF86bn in Switzerland, and CHF81bn ex-Sw.

This CHF245bn in deposits compares to loans of CHF264bn, with total assets of CHF531bn, and tangible equity at CHF42bn. Within liquid assets, Credit Suisse at 4Q22 had CHF68bn in cash and due from banks, CHF65bn in trading assets at fair value (of which CHF44bn unencumbered), and CHF41bn in fair value central bank funds sold/reverse repos/securities borrowing transactions.

Meanwhile, its average daily LCR was 144% for 4Q22. At a competitor conference on March 14th , the CEO indicated that this level had increased to close to 150%, and with spot rates even higher. Its CET1 ratio was 14.1%, comprised of CHF35bn in CET1 capital ,and CHF251bn in RWAs, 370bps above regulatory requirement , implying CHF9.3 bnin excess capital .Credit Suisse additionally hadCH F14 .7 bnin additional tier1 capital.

What is the root cause of Credit Suisse's problems?

Credit Suisse's problems did not arise recently. At the end of 2022, the bank saw an unprecedented level of outflows, and in November, its five-year CDS had risen to nearly 400. It was involved in a series of scandals, starting with the 1Malaysia Development Berhad scandal in 2015. The collapse of Archegos Capital in 2021 also caused it to lose more than $5 billion, which may force it to raise new financing to replenish its capital and undergo some debt restructuring.

Greensill's bankruptcy exposed the high-risk assets behind Credit Suisse, and many media outlets called it the second "Lehman Brothers". According to Credit Suisse's 2022 financial report, it had a net loss of CHF7.3 billion for the year, with large outflows of deposits and net assets in the fourth quarter.

Is Silicon Valley Bank's bankruptcy related to Credit Suisse?

Silicon Valley Bank's bankruptcy does not have a direct impact on Credit Suisse. It can be said that Silicon Valley Bank's bankruptcy played a role in Credit Suisse's share price decline, but it was not a direct cause.

In a market with panic sentiment, Silicon Valley Bank's bankruptcy may trigger a chain reaction on market sentiment, which could affect customer deposit behavior and new financing behavior. Previously, Saudi National Bank Chairman said that due to regulatory restrictions "we can no longer inject capital into Credit Suisse because our stake will exceed 10%, which is a regulatory issue".

Compared with some regional small and medium-sized banks, Credit Suisse is a global systemically important bank with a larger scale and wider scope and degree of impact on various dimensions.

What are the implications of Credit Suisse for the banking industry?

In the short term, it will affect the overall market sentiment and increase market volatility; in the medium and long term, it will also prompt central banks (the European Central Bank and other regional central banks) to abandon their original tightening policy path for maintaining market stability.

For companies, on one hand they need to reform their business while reducing expenses through cost-cutting measures such as layoffs; on the other hand ,Credit Suisse has also significantly increased its deposit rates to attract customers and replenish liquidity. At the same time ,it abandoned its previous immature risk management system ,and hired Goldman Sachs' deputy chief risk officer in 2022 .

For regulators ,they need to further examine market liquidity supply and money supply velocity ,and conduct stricter tests on future growth pressures ,and also re-examine the applicability of current regulations。

What are the possible development of the Credit Suisse incident after the crisis?

Credit Suisse is very different from Lehmans. It is Switzerland's second-largest bank and the Swiss government and central bank will not ignore it. On the evening of March 15, Swiss regulators said they would provide liquidity support and the market also expects further assistance or other measures, including spinning off different divisions of Credit Suisse, long-term cooperation with larger Swiss rival UBS Group, acquiring Credit Suisse shares as capital injections ,or even nationalizing Credit Suisse at worst.

As for whether it will continue to spread ,there are still variables .The main manifestations are:

1. Europe has higher leverage than the United States and weaker economic growth momentum;

2. Although the euro zone has a unified monetary policy ,different regions have independent fiscal policies ,which will lead to long-term policy divergence .The European Central Bank's risk disposal operations may have many inconveniences;

3. Uncertain geopolitical influences ,such as the Russo-Ukrainian war ,major economic power elections .

In general ,Credit Suisse's problems are more of a case-by-case basis .In the current environment where regulation is stricter than during the subprime crisis ,the probability of systemic risk is low .Of course ,the most important thing to pay attention to now is asset price volatility itself and liquidity shocks .