Welcome Back to "Business Through Elaine's Lens"
I am Elaine Hua, and I'm back at my blog. After Silicon Valley Bank went bankrupt, within just a month comes another banking giant's demise - Credit Suisse. The speed at which these financial institutions are collapsing is truly astonishing, so let's dive into what happened with this 167-year-old banking institution.
A Banking Giant's Fall
Credit Suisse wasn't just any bank. Founded in 1856, it had over 160 years of history and was considered one of the 30 globally systemically important banks with assets under management exceeding $1.5 trillion. To put this into perspective, that's nearly twice Switzerland's entire GDP of $800 billion.
Unlike Silicon Valley Bank, which was primarily a regional bank focused on the startup ecosystem, Credit Suisse had a massive international presence, particularly in investment banking. For years, it had been identified as a global systemically important bank, meaning its failure would have significant implications for the global financial system.
The Road to Collapse
While Credit Suisse's balance sheet was reasonably strong (unlike the US banks that collapsed recently), its reputation had been severely damaged. A series of endless scandals, most stemming from senior management and the investment banking division, destroyed what was once an impressive brand.
Credit Suisse had been plagued by scandal after scandal. In 2014, they were fined $2.6 billion after being convicted of helping American citizens evade taxes. In 2019, they were caught in an embarrassing "spy scandal" where they hired private detectives to follow former employees. They had a criminal conviction for allowing drug dealers to launder money, suffered a massive leak of client data to the media, and faced financial disasters with Archegos and Greensill.
Perhaps most devastating was the 2021 Archegos Capital collapse, where Credit Suisse lost $5.5 billion in just 48 hours - more than their entire annual profit. While other banks like Goldman Sachs managed to escape with minimal losses, Credit Suisse bore the brunt of the fallout, cementing its reputation as poorly managed.
The "Absolutely Not" That Broke the Bank
The final blow came in March 2023. In the midst of market tension following Silicon Valley Bank's collapse, Credit Suisse's largest shareholder - Saudi National Bank - was asked in an interview whether they would provide additional financial support. The chairman's response of "absolutely not" sent shockwaves through the financial markets. This statement caused Credit Suisse's stock to plummet 20% in a single day, creating a crisis of confidence that couldn't be reversed.
The Swiss government quickly stepped in, announcing they had prepared 54 billion Swiss francs to ensure Credit Suisse's liquidity. While this temporarily stabilized the markets, behind the scenes the government was orchestrating a rescue through acquisition.
The Forced Marriage
On Sunday, March 19, it was announced that UBS, Switzerland's biggest lender, would merge with Credit Suisse for 3 billion Swiss francs in what many called a "shotgun marriage" given the involvement of regulators. Regulators completely bypassed shareholder voting rights with this deal and actually violated the typical hierarchy of investments by causing bondholders of the bank's AT1 bonds to lose all of their money while common shareholders still received something for their shares.
The Swiss government essentially forced this deal, giving UBS and Credit Suisse just 48 hours to reach an agreement over a weekend. UBS initially offered just 10 billion Swiss francs (about $10 billion), which Credit Suisse considered insulting given their market valuation had been many times that amount. To sweeten the deal for UBS, the Swiss government took the unusual step of writing off 17 billion dollars worth of AT1 bonds and provided 100 billion francs in liquidity guarantees.
The final purchase price of $3.2 billion was just one-quarter of Credit Suisse's value before this crisis, one-tenth of its value a year earlier, and an astonishing one-hundredth of its peak value in 2007.
Why Did Credit Suisse Really Fail?
Despite the "Absolutely Not" comment serving as the trigger, and despite concerns about liquidity similar to Silicon Valley Bank, Credit Suisse's fundamental problem was different. Its liquidity indicators and capital adequacy ratios actually met regulatory standards. As a globally systemically important bank, it was subject to strict risk management requirements that prevented the interest rate risk issues that plagued SVB.
The real issue was market confidence. After years of scandals, the market simply lost faith in Credit Suisse. For a bank, trust is paramount - clients need to feel secure when depositing money or conducting transactions.
Credit Suisse's internal management problems gradually corroded the company's culture, resulting in weak risk management across operational, moral, and credit risks. Whether helping clients evade taxes or providing excessive credit exposure to Archegos, these decisions prioritized profit over risk management.
As Richard Coffin of "The Plain Bagel" pointed out, if you were to ask anyone which globally systemically important bank was going to fail when times got tough, Credit Suisse would have been a top candidate. People had been betting on Credit Suisse's failure for some time, and the bank had lost 90% of its value from 2014 to 2022 before the more recent issues arose.
What Does This Mean for Global Banking?
While this isn't likely the end of banking concerns globally, it's important to recognize that Credit Suisse's situation was uniquely problematic. It shouldn't necessarily be seen as representative of the health of the international banking community.
There are reasons to believe that the European banking system is better positioned to weather current stresses than US regional banks of similar size. European banks have faced tougher regulations following the euro crisis, with detailed standards for testing interest rate risk applied to every significant bank in Europe.
However, the market remains highly sensitive. The collapse of both Silicon Valley Bank and Credit Suisse, while different in nature, has shaken market confidence. Some analysts are now watching other potentially vulnerable institutions, including Deutsche Bank, US commercial real estate, and Japanese government bonds.
Final Thoughts
The fall of Credit Suisse represents more than just another bank failure. It's a cautionary tale about the importance of risk management, corporate culture, and maintaining market trust. While many focus on financial metrics and balance sheets, Credit Suisse ultimately collapsed because it had burned through its most valuable asset - its reputation.
The acquisition by UBS creates a new Swiss banking giant with assets under management of around $5 trillion - six times Switzerland's GDP. This concentration of financial power raises important questions about systemic risk and "too big to fail" institutions.
As we move forward through 2023's turbulent financial landscape, I'll be keeping a close eye on how these banking tremors affect the broader economy. Until next time, this is Elaine Hua, viewing business through my lens.