Deprcon warning (Free)
Credit Suisse and interbank markets
Credit Suisse is in existential trouble after Saudi National Bank announced that it will not provide further funding to the bank. What’s next?
There basically are just three options left (while there’s still a miniscule chance that some party would invest to CS with, e.g., government guarantee):
The Swiss government takes a major stake on CS (capital injection).
Some major bank(s) buys either whole CS or some parts of it and rest is wound down (effectively rearranged as a ‘bad bank’ controlled by authorities, possibly including the ECB).
Authorities take over the bank and wound it down (collapse).
The last option would most likely push the European banking sector into a tailspin with interbank markets freezing over. Stress in the European interbank market has already exploded. These imply that the collapse of CS would become a “Lehman moment” pushing Europe and the world into another banking crisis. This is why every effort and venue is likely to be pursued to avoid it.
Currently the rumor is that the Swiss government would try to “stabilize” CS. Because it’s unlikely that any institution would invest into CS in its current form, this would imply that the government, with the likely help of the ECB, would take a major stake on the bank. However, its unclear how big the losses of the CS are (what is the “material weakness”), and numbers simply do not add up. The assets of CS totaled CHF 531.4 billion in 2022, while the budget of Swiss government was around CHF 240 billion. This means that if capital injections of government, probably in the range of tens of CHF billion, fail to stabilize the bank (i.e. restore the trust of other financial institutions to the bank), it has to be restructured.
This would lead to option #2, where some parts of the CS would be sold and the government would take over the rest. We are expecting that regardless of what the Swiss government, Swiss National Bank and the ECB come up with, or if they find some institution to invest into CS (unlikely), this “chopping off“ of the bank is the most likely end-result, while some other measures, like capital injections from the bank, may buy the bank some more time.
The problem is that whatever is done to CS, it’s unlikely to stop the banking crisis which started, but was halted by the exceptional actions taken by U.S. authorities, from the collapses of the Silicon Valley Bank and Signature Bank. If problems of CS can be solved somehow, the underlying issues in the economy and the banking sector will not abate (we return to these later this week).
We will continue to monitor the situation closely.
Disclaimer:
The information contained herein is current as at the date of this entry. The information presented here is considered reliable, but its accuracy is not guaranteed. Changes may occur in the circumstances after the date of this entry and the information contained in this post may not hold true in the future.
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