Overview
Big European banks are enjoying high capital levels, strong liquidity coverage ratios, and the best profitability in over a decade on the back of rising interest rates. Most large banks mark their bond portfolios to market and the quality of their assets remains benign. You’d have to go back a long time to find banks making this much money.
But even against this backdrop, only a few days after the collapse of Silicon Valley Bank (and two smaller banks in the US over the weekend), shares in Credit Suisse lost and then promptly regained more than a fifth of their value over two days, while large lenders rushed to deposit billions with First Republic Bank when after-hours trading weakened its finances. Clearly investors have concerns about the potential weakness of some banks.
Credit Suisse has already faced a wave of governance scandals, management changes, and restructurings over recent years. It even weathered large outflows from its core wealth management business late last year that were comparable with the run on deposits that triggered SVB’s failure.
Yesterday, the bank announced that it will borrow up to CHF 50 billion ($54 billion) from the Swiss National Bank (SNB) through a covered loan and short-term lending facility that were fully collateralised. It also launched a CHF 3 billion buyback of its own senior debt. Questions remain as to how Credit Suisse will repay the new facilities from the SNB, although the bank’s capital ratios remain in reasonable shape largely due to newer and tougher Basel IV banking regulations in Europe.
This step from the SNB has alleviated the immediate pressure on Credit Suisse. And the Swiss authorities have a number of other facilities they can use if necessary. The Swiss banking sector is not bound by the Dodd-Frank Act, nor by the tight regulations of the European Union, so the SNB could step in to stem any further outflows with either a bail-in or a bail-out, perhaps by purchasing newly issued stock or by expropriating existing shares or bonds.
This week’s events are not easily dismissed. Credit Suisse isn’t a mid-tier regional lender like SVB; it’s a globally systemically important bank (or GSIB) with many business lines alongside its bedrock wealth and private banking segment, and a complex network of counterparties and trading positions around the world.
But the crises at Credit Suisse and SVB reflect isolated, company-specific issues. Silicon Valley Bank was heavily concentrated on lending to venture capital-backed firms and overly invested in long-duration, low yielding Treasuries and asset-backed securities, while the concerns about Credit Suisse seem to be dominated by idiosyncratic factors - most of which have been well known for some time.
By contrast, the overall European banking system is much better capitalised than during the 2008 crisis, credit quality and liquidity are much stronger, interest rates remain supportive of bank profitability overall and the European economy itself remains resilient.
