When confidence is lost in one bank, it tends to evaporate, fairly or not, from other banks.
From time to time, we are reminded that, much more than is the case for most businesses, banks depend on confidence. The way they work, at its most basic, is to borrow short-term (classically, deposits) and lend for the longer term. They will keep money in the till (unless someone like Bailey Brothers Building & Loan’s notorious Uncle Billy is minding it) to cover day-to-day withdrawals. But if too many depositors want too much of their money back at the same time, there will, as Silicon Valley Bank discovered last week, be trouble. And when confidence is lost in one bank, it tends to evaporate, fairly or not, from other banks. To use the jargon, the contagion spreads.
It doesn’t help that we are now moving from a long period — that of ultra-low interest rates — in which the price of money was artificially depressed to one in which it is somewhat more realistically priced (many lending rates are still negative in real terms). Mispricing money is an invitation to disaster, and, whatever the regulatory machinery we have in place, banks are not going to emerge unscathed. That said, the fact that the Fed’s stress tests (tests it runs on banks) had not included the effect of interest-rates hikes for years was (to me anyway) a surprise. . . .
Putting questions of moral hazard to one side (a topic for another time) we’ll have to see whether the steps taken by the FDIC to underwrite deposits at SVB and Signature are enough to maintain confidence in our banking system, particularly where smaller banks are concerned. Time will tell. While the ratings agencies are what they are (not that much), it was worth noting that on Monday, Moody’s changed its view on the entire U.S. banking sector from stable to negative. Whether that was correct (probably) or not, we can be reasonably sure that if the FDIC had not done what it did, new news from Europe would have set off another flight to safety over here.
That news came out of Credit Suisse (Switzerland’s second largest lender), a bank that has been in the wars for a long time now, thanks to a series of disasters and very expensive scandals. The bank’s share price (here quoted in dollars) tells its own story: Credit Suisse traded at around $20 in mid 1995, peaked at around $72 in April 2007, and is now priced at around $2. That’s around 15 percent of book value, a price that means that, rightly or wrongly, no one puts much stock in that book value. In 2007, Credit Suisse was the seventh largest bank in the world by market value. It’s now ranked in the 150s.
The price of the bank’s credit-default swaps (a way for holders of a company’s debt to insure against a default, although CDS can also be used as a purely speculative instrument) has soared to levels not seen since Lehman days, and cost around 18 times as much as those for UBS (another large Swiss bank). Interestingly, the curve for the pricing of Credit Suisse CDS was inverted on Wednesday (an unusual phenomenon, which means — in theory anyway — that those buying them think the greatest point of danger is in the short-term). Unsurprisingly, therefore, the bank’s bonds have also collapsed in price. That said, it needs to be remembered that CDS are by no means accurate measures of default risk. As alluded to above, they can be used to play or hedge the market, thus the wild swings that can sometimes be seen in their prices.
Deposits have been flowing out of Credit Suisse in recent months. Unlike SVB and Signature, nobody would deny that is a systemically important bank. Indeed it is a globally systemic bank.
After all its years of trouble, Credit Suisse is in the middle of a three-year restructuring program, but in the last couple of days, it has received two major blows, made worse by the crisis of confidence in banks sweeping in from across the Atlantic. The most important came from the bank’s lead shareholder.
Credit Suisse’s share price plunged as much as 30pc after its biggest investor said it will not stump up any more cash to backstop the struggling bank. Ammar Al Khudairy, chairman of the Saudi National Bank, ruled out any further support, saying there were “many reasons” not to put any more money in.
Asked on Bloomberg TV whether Saudi National Bank would be open to providing capital to Credit Suisse if there was a call for additional equity, SNB chair Ammar Alkhudairy said: “The answer is absolutely not.”
He said owning more than 10 per cent of Credit Suisse would result in unwanted regulatory requirements, though he added he supported the bank’s restructuring plan and did not think it needed more capital.
And then there was this (also via the Financial Times):
Credit Suisse on Tuesday revealed that its auditor, PwC, had identified “material weaknesses” in its financial reporting controls. That led to the delay of the publication of its annual report last week after the US Securities and Exchange Commission asked for more clarity on the flaws.
And then (via the Financial Times) on Wednesday evening, some relief:
The Swiss central bank said it would provide a liquidity backstop to Credit Suisse after the lender’s shares fell as much as 30 per cent and sparked a broader sell-off in European and US bank stocks.
In a joint statement with financial regulator Finma on Wednesday evening, the Swiss National Bank said there were “no indications of a direct risk of contagion for Swiss institutions due to the current turmoil in the US banking market”…
“Credit Suisse meets the higher capital and liquidity requirements applicable to systemically important banks,” the SNB and Finma said. “In addition, the SNB will provide liquidity to the globally active bank if necessary.”
And the bank does indeed have plenty of capital (for now).
Credit Suisse has plenty of capital. Moreover, it has hedged risks on hold-to-maturity securities. On a three-month average, bosses say the bank has a liquidity coverage ratio of 150 per cent of stress test losses. That is plenty, though well down on a peak of 221 per cent in the third quarter of 2021.
Shortly after the Swiss Central Bank came out with its statement of support, Credit Suisse said that it planned on borrowing up to $54 billion from it. It would also access a short-term-liquidity facility offered by the SNB.
That may provide some relief, but these jitters are not going away, and they won’t be confined to Credit Suisse.
The Financial Times (my emphasis added):
“Credit Suisse is an isolated case,” said Charles-Henry Monchau, chief investment officer at Syz Bank. “But banks in Europe, because of regulatory pressure, had to load up on negative-yielding bonds at the worst time and now they are facing major unrealised losses.”
That sounds more than a little familiar.
Meanwhile, to add insult to injury (via Bloomberg):
From SVB’s collapse to Credit Suisse’s troubles, all the turmoil in the global banking sector has seen Chinese banks emerge as havens. China’s CSI 300 Financials Index gained about 0.3% so far this week, while a gauge of US lenders has lost 12%