To The Moon

Two US banks failed and were subsequently bailed out by the US government. The market reacted positively at first, but the good news was short-lived. Soon after, news broke of Credit Suisse running into trouble in Europe.

Now, let's catch up with the situation at Credit Suisse.

Why is Credit Suisse important?

Credit Suisse is among the 30 global financial institutions designated as systematically important by the Financial Stability Board, indicating that they are deemed "too big to fail." The significance of this designation lies in the potential repercussions of such institutions collapsing.

In contrast, Silicon Valley Bank and Signature Bank are relatively smaller than Credit Suisse. However, if Credit Suisse were to fail, the banking crisis could worsen and spread more widely due to the magnitude of its impact on the financial system.

What is the issue with Credit Suisse now?

In October 2022, rumors began circulating on social media about an imminent failure of Credit Suisse. While these rumors remain unconfirmed, the implosions of US asset manager Archegos and UK firm Greensill have already cost Credit Suisse more than $5 billion. These scandals are just the latest in a string of high-profile controversies that have plagued the bank in recent years.

In a more recent development, Credit Suisse has admitted to having "material weaknesses" in its internal controls over financial reporting, which has led to the restatement of the cash-flow statements for 2019 and 2020.

Unfortunately for the bank, this news comes at a time when the recent failures of US banks have heightened concerns about the stability of the financial system.

What has been the impact to Credit Suisse?

Credit Suisse's share price saw a sharp decline of 24% overnight. Additionally, the value of its USD bond maturing in 2027 has dropped by 10%.

Despite the market turmoil, Credit Suisse's CEO, Ulrich Koerner, has stated that the bank's capital and liquidity remain "very strong."

It's possible that the negative impression of Credit Suisse among investors and the public is worse than the actual state of the bank's fundamentals.

What is the remedy?

The Swiss central bank reassured that Credit Suisse has adequate capital and liquidity and was prepared to shore up the liquidity at Credit Suisse if required.

Credit Suisse has also said that it will borrow up to 50 billion Swiss francs (US$54 billion).

This came after Saudi National Bank, the largest shareholder of Credit Suisse, said that it would not be investing further due to regulatory limits on owning more than 10% of the bank.

Ultimately, the challenges facing Credit Suisse appear to be rooted in a lack of confidence among investors, which has been compounded by concerns about the unresolved banking issues in the US. This has led some investors to worry about a potential contagion effect.

So what?

In my opinion, the current banking crisis differs from the 2008 crisis in its underlying causes. While the 2008 crisis was brought about by reckless lending practices, the current crisis is a result of banks transitioning from an era of ultra-low interest rates to one of the fastest interest rate hikes in history.

Banks that have not diversified their sources of liquidity are now at risk of experiencing bank runs and potential collapse. This is not just limited to banks in the US, as low interest rates have been prevalent in Europe and Asia as well.

To address this crisis, governments and central banks across the world must work to restore confidence and help banks navigate this transition period.

I'm optimistic that this banking crisis can be resolved, as there is widespread awareness of the magnitude of the problem, which may help prevent a complete collapse of the financial system.

But it may not be resolved without some pain. I expect the stock market to experience more selldowns before it gets better.