One thing triggers another, and just when we thought the dust was settling down after the US government stepped in to provide a financial backstop and guarantee depositors of the failed banks Silicon Valley Bank and Signature Bank over the last weekend, fate wills it otherwise. This time a bulge-bracket multinational investment bank with the potential to cause a much wider systemic failure was involved - Credit Suisse. At the worst point yesterday, during trading hours, its share price plummeted more than 30%!
How Did Credit Suisse Sink To Where It Is Today?
Credit Suisse's woes began when it got involved in a series of scandals including getting criminally convicted for allowing drug dealers to launder money, facilitating wire fraud in the Mozambique corruption case, and succumbing to immense loss from the failure of Archegos Capital due to ineffective risk management among others. Aside from settling massive legal costs and penalties, these also took a heavy toll on both client and investor confidence leading to outflows and a dramatic drop in its share price in recent years.
But that said, Credit Suisse's share price has long been heading south since the Great Financial Crisis in 2008. If we compare it against its historical peak, it has already fallen by an astounding 95%. And if we zoom in to the more recent period covering its scandals since 2021, its shares had also slid an enormous 81% since March 2021.
In comparison with other banks in its league, its performance after the Great Financial Crisis tells you quite clearly how "well" it is doing.
What sparked the dramatic selloff yesterday? It is a culmination of already souring sentiments brought about by the collapse of the 2 US banks and what was reported on Credit Suisse yesterday. First, their largest investor Saudi National Bank declared that they will not provide further financial assistance to Credit Suisse on regulatory grounds that they would exceed the 10% ceiling shareholding they are allowed. And then Credit Suisse's annual report which was delayed showed a staggering loss of $8 billion, their biggest yet since 2008. That is also the third consecutive yearly loss by the company. They further stated that customer outflows have yet to reverse even though it has stabilized to lower levels. And as if these are not enough, they also flagged material weaknesses in their financial reporting controls.
In the face of the market onslaught, Credit Suisse appealed to the Swiss National Bank and FINMA for a public show of support to stem the panic. I must say the regulators acted pretty swiftly to provide assurance and extend a Covered Loan Facility to Credit Suisse. Credit Suisse, on the other hand, wasted little time in maxing out the offer and getting a $54 billion loan from the Swiss National Bank. Now, that is despite their stressing time and again that they are strong and well-capitalized, with liquidity figures exceeding the regulatory requirements. They explained the loan is to further beef up additional liquidity to support their core businesses. Some are reassured while others may think their immediate action in fully utilizing the loan hides underlying problems that have not yet surfaced. I guess that is up to interpretation.
What is going to happen next from here?
With more banks falling and this time around a big one like Credit Suisse, it does suggest the problem may be less contained than we think. But as a bank that was long plagued with problems, it does make them a vulnerable candidate. Because trust and confidence which are key to running a bank are what it lacks before this thing even hits.
As we transition from a low to a high-interest rate era, more such problems can surface as the higher rates start to bite. With the scale and potential damage a contagion can cause, regulators will move to impose stricter controls on smaller banks. Market volatility will persist longer as participants look for greater clarity in the health of the banking sector and the broader economy as well as what the central banks are going to do. At the point of writing, the probability of a 25bps hike at the next meeting as suggested by where the Fed Funds futures are trading is 66%. But the numbers have been on a wild ride recently so keep a watch on it closer to the FOMC meeting next week.
On a more positive note, central banks acted fast this time in making sure depositors are guaranteed access to their money and banks have access to additional funding. While that does not mean it will stop outflows from banks facing issues, it does send strong signaling to people that we have you covered and there is no need to panic. Panic and loss of confidence are what sets off a bank run.
Meanwhile, if you invest and are well diversified across different asset classes with a good mix of quality risky and safe haven assets, you should be able to ride through the period relatively better.
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