It’s been a tough week for share and bond owners of Switzerland’s second largest bank. Shares in Credit Suisse Group started the week at CHF 2.46 and ended the week at CHF 1.86, a fall of 24%. However, at one point they were down 37% at CHF 1.56.
On 15 March 2023, the Swiss National Bank (SNB) and regulator FINMA published a statement asserting that the problems experienced by certain banks in the US do not pose a direct risk of contagion for the Swiss financial markets, underlining the strict capital and liquidity requirements applicable to Swiss financial institutions. In addition, the statement said that Credit Suisse meets the capital and liquidity requirements imposed on systemically important banks and, if necessary, the SNB would provide Credit Suisse with liquidity. The promise of liquidity and the resulting CHF 50 billion credit line Credit Suisse secured from from the SNB eased downward pressure on the share price.
At the same time there were rumours of a possible government-orchestrated tie-up between UBS and Credit Suisse – CS would become part of the much larger UBS Group. However, according to Bloomberg, UBS Group AG and Credit Suisse Group AG are opposed to a forced combination. UBS would prefer to focus on its own strategy and is reluctant to take on risks related to Credit Suisse. And management at Credit Suisse would prefer to see through its turnaround strategy, which has been underway for some time.
The separation of Credit Suisse’s Swiss unit is another option being discussed in the talks between executives and government officials, Bloomberg reported. Even if there’s little appetite within UBS or Credit Suisse for a forced merger or a bailout, the value of the Swiss bank is seen as an asset that could be called on to bolster the group, wrote Bloomberg.
How bad is the financial situation at Credit Suisse?
According to information filed with the US SEC – Credit Suisse in also listed in New York – the bank was solvent at the end of 2022. In simple terms, solvency means there are more assets than liabilities. At the end of 2022, the group had, according to its accounts, CHF 530 billion of assets and CHF 482 billion of liabilities, meaning it had surplus assets or total equity of CHF 48 billion. This means it could sustain a 9% asset haircut before becoming insolvent. Its assets are 51% loans, 13% cash, 12% trading assets, 11% central bank funds and 13% other – source: CS Form 20-F 2022.
An essential ingredient in banking is confidence. Even the strongest bank would be unlikely to survive a bank run.
To make money banks must lend at higher rates than they pay the depositors and others who lend to them. In normal times the highest rates tend to be found on long term fixed rate bonds or loans. This leaves banks with short term funding on one side and long term investments on the other. If nervous depositors rush to withdraw then the bank will be forced to sell its holdings of bonds and loans to fund withdrawals. Quickly liquidating assets to fund deposit withdrawals often comes with losses. Especially when interest rates have risen since the assets were bought. If sufficient losses occur on the sale of bonds and loans a bank can tip into insolvency, the point where liabilities exceed assets. Given this reality it is critical to maintain calm among depositors and investors to keep the system running smoothly.
Beyond the risks of panic, banks are now faced with another difficult reality. Depositors are being reminded that leaving money in a bank account is a pretty bad idea. Moving cash from the bank into short dated government (or other low default) bonds has rarely been so attractive. Depositors can get a significant boost in interest, reduce risk and retain much of the liquidity if they buy short duration bonds. Increasingly, banks will need to offer better deposit rates to retain deposits, squeezing their profits further.