Credit Suisse On The Brink, Which Bank Will Go Next?

For the past few days we have been focused on the banking crisis in America, with Silicon Valley Bank, Signature Bank and First Republic Bank went into administration as rising interest rates, falling bond yields and defaulting borrowers combined to make them insolvent. It was always clear this crisis was not going to be limited to America but may be a surprise to people not involved in finance or investing is Swiss retail bank Credit Suisse. Swiss bankers are traditionally known for their cautious approach to lending mess so how did one of their leading banks, and one designated in previous crisies as too big to fail get into the impending mess.

The exposure of Credit Suisse to far too much dodgy debt has been known for a long time, in fact shareholders in the bank have been asked to bail it out several times. This time however, the distressed bank’s biggest shareholder, Saudi National Bank (SNB), which is 37% owned by the kingdom's sovereign wealth fund, has publicly ruled out further investment for the bank.

Shares of Swiss banking giant fell by more than 20 percent and the cost of insuring its bonds against default soared on Wednesday when SNB, its biggest shareholder said it would “absolutely not” provide additional support.

The decline brought shares to an all-time low. Concerns about the bank’s health and stability have been weighing on the stock for three months.

The most recent sell-off appeared to be triggered by remarks from the chairman of Saudi National Bank, the biggest shareholder of Credit Suisse, when asked if the Saudi bank was open to further capital injections.

“The answer is absolutely not, for many reasons outside the simplest reason, which is regulatory and statutory,” Chairman Ammar Al Khudairy said in an interview with Bloomberg TV.

SNB's announcement that it is not prepared to flush any more money down the toilet that is Credit Suisse is just about the worst news stockborkers and bond traders could have been given with markets already in a blind panic following several bank runs and resultant bank shutdowns.

A couple of paragraphs quoted by Zero Hedge in their writeup of the situation explain how this has led to “the cost of insuring the bank's bonds against default in the near term to distressed levels.” 

"One-year credit default swaps for the embattled Swiss lender were indicated at 835.9 basis points on Tuesday's close of business, based on pricing source CMAQ. Other pricing sources point to a further rise on Wednesday, while a level of 1,000 would indicate serious concern," Bloomberg said. 

Credit Suisse’s CEO was on the stump defending the bank and its capital ratios today, but that doesn’t mean much in an investing environment where any hint of negative performance can immediately trigger a collapse of share prices and market capitalisation.Take these examples of recent attempts to reassure investors:

“I would ask everyone to stay calm and to support us just like we supported you during the challenging times,” Silicon Valley Bank’s CEO said just days before the bank was taken over by the FDIC.

“Signature Bank, a New York-based, full-service commercial bank, announced today updated financial figures as of March 8, 2023 and reiterated its strong, well-diversified financial position and limited digital-asset related deposit balances in the wake of industry developments,” Signature Bank wrote in a PR just 3 days before it was also taken over by regulators.

And now, today: "We have strong capital ratios, a strong balance sheet," said Credit Suisse Chairman Axel Lehmann, dismissing rumours that the bank was trying to negotiate terms of a bail - out with the Swiss government.

Earlier this month, while speaking at the Financial Sector Conference in Saudi Arabia, Lehmann said government assistance "isn't a topic" for the lender as the Swiss bank sought to shore up confidence among shareholders and clients.

This may come as a surprise to some, but the Chairman may have 'misplaced' the truth.

The Financial Times reports that, according to three people with knowledge of the talks, Credit Suisse has appealed to the Swiss National Bank for a public show of support.

Credit Suisse also asked for a similar response from Finma, the Swiss regulator.

“It is looking inevitable that the Swiss National Bank will have to intervene and provide a lifeline,” said Octavio Marenzi, analyst at Opimas.

“The [Swiss National Bank] and the Swiss government are fully aware that the failure of Credit Suisse or even any losses by deposit holders would destroy Switzerland’s reputation as a financial centre.”

This latest news comes on top of a report that the ECB has asked EU lenders to disclose their exposures to the Swiss lender, a person familiar with the matter told the Financial Times.

Finally, Bloomberg reports that the US Treasury says it's monitoring the Credit Suisse situation, and is in touch with global counterparts.

Officials at the Treasury Department are working closely with European regulators, said one of the people, who spoke on condition of anonymity.

As we wait for the next bank to collapse I can only quote the words of a wise and articulate man I once worked with, when he was told 'government experts' were being brought in to supervise the multi - million £ project we were working on as it was of national importance."

He said: "We're fucked, I'm fucked, you're fucked, we're all fucked. We're fucking fucked."

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Market Panic As US Banking Crisis Spreads

 

 

"It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning. " Henry Ford.

by Phil T Looker, 14 March  2023

After the dramatic collapse of Silicon Valley Bank (SVB) at the end of last week, the biggest US bank failure since 2008, governments and regulators around the world are running around in headless chicken mode, trying to find a way to avoid a descent into turmoil throughout the banking sector and head off any further bank runs as depositors get their money out while they can.

Already, with regional bank First Republic following SVB into insolvency, panic in the market has seen a third  bank in the US fall into the arms of regulators: New York-based Signature Bank, with assets of $110bn, was seized on Sunday night, becoming the third largest bank failure in US history.

In the US, the Fed on Sunday guaranteed all SVB deposits and launched an emergency lending facility, while President Joe Biden pledged to do “whatever is needed” to protect deposits.

After the dramatic collapse of Silicon Valley Bank (SVB) last week – the biggest US bank failure since 2008 – governments and regulators around the world are scrambling to avoid a spiral into turmoil and stem contagion.

Already, panic in the market has seen a second bank in the US fall into the arms of regulators: New York-based Signature Bank, with assets of $110bn, was seized on Sunday night, becoming the third largest bank failure in US history.

 US central bank, The Federal Reserve, guaranteed all SVB deposits on Sunday and launched an emergency lending facility, while President Joe Biden pledged to do “whatever is needed” to protect deposits. We can excuse Dementia Joe of course, but every senior banker, accountant, economist and political policy maker ought to be fired if they don't know what is needed. The question that needs to be asked is why these wombat felchers did not do what was clearly needed, long ago.

What confuses global policymakers so much?

The banks create the money first, and then they have to get it back again. Global policymakers don’t notice the claim on future spending power piling up in the banking system.

At 25.30 mins in the video linked below you can see the super imposed private debt-to-GDP ratios.

https://www.youtube.com/watch?v=vAStZJCKmbU&list=PLmtuEaMvhDZZQLxg24CAiFgZYldtoCR-R&index=6

The banks create the money for loans to buy assets. They do this by turning a claim on future earnings into an asset. As a business banking manager for a major UK bank I created £millions by lending my clients money. Every £ I loaned made the bank £1 richer. The assets sit on one side of the balance sheet and the loans on the other. If anyone defaults the bank can repossess that asset to recoup the money. Everything balances and the system is fine, unless the person negotiating the loan miscalculates the risk and lends money secured against a worthless asset.

Central bankers provide easy money to prop up the markets by issuing treasury bonds at low interest rates. Everything is still fine. Central banks stop providing easy money to prop up the markets. Borrowers can no longer borrown more to cover their interest payments on existing loans. Asset prices fall and suddenly a bank's liabilities are greater than its assets. Nobody wants to buy debt when the debtor cannot pay the interest due and black holes start opening up in the banking system.

The effects are far reaching, Bank credit effectively brings future spending power into today.

Private and corporate banks create the money supply.

https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf

Money and debt come into existence together and disappear together like matter and anti-matter. Bank loans create money and debt repayments to banks destroy money. Bank loans create 97% of the money supply

Bank loans create money and debt repayments to banks destroy money. What does this mean in the real world?

Bank credit effectively brings future spending power into today. They create the money out of nothing for you to spend today, and you make the repayments in the future. When you make the repayments, this destroys money. Interest is the charge you pay for the service of borrowing your own money from the future.

Early success can be achieved at the expense of an impoverished future. Global policymakers just don’t notice the claims on future spending power piling up in the banking system.

Obviously what needs to be done to get us out of the boom and bust cycle is a reform of the regulatory system to ensure that loans are properly secured against real assets with real value and not against fairy dust.

This concludes lesson one of our Banking for Wankers course. 

 
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U S Regional Bank First Republic Crashes As America's Banking 'Crisis In Confidence' Becomes Contagious

by Phil T. Looker.

Shares in America's First Republic Bank's crashed when the New York stock market opened for trading this morning. The crash was triggered by a statement issued on Sunday night that sought to ease investor worries about the bank's liquidity situation in the wake of the failure of Silicon Valley Bank. Shares in the San Francisco based regional bank are down 60% on last week's close.

Customers queue outside a First Republic branch hoping to get at least some of their money out.

In the Sunday night statement the bank claimed that it had more than $70 billion in unused liquidity to fund operations from agreements that included the Federal Reserve and JPMorgan Chase & Co.

"The additional borrowing capacity from the Federal Reserve, continued access to funding through the Federal Home Loan Bank, and ability to access additional financing through JPMorgan Chase & Co.increases, diversifies, and further strengthens First Republic's existing liquidity profile," the bank said, adding that more liquidity is available through the Fed's new lending facility. 

Unfortunately this information, coming only days after Silicon Valley Bank had issued similar assurances shortly before being declared insolvent, failed to assure investors and depositors.

Bloomberg's Ven Ram opined, "The plunge in its shares is classic market psychology at work, with investors starting to question the credentials of any lender that may be remotely in the same category of Silicon Valley Bank," . 

Zero Hedgepointed out over the weekend, "as a result of the SVB failure - one look at what is already taking place at some smaller, vulnerable banks such as this First Republic Branch in Brentwood should be sufficient to see what comes to morrow if the Fed makes the wrong decision today."

Despite the emergency lending program announced by the Fed and Treasury on Sunday to increase the availability of funds to meet bank withdrawals and prevent runs on other banks, fears have not been alleviated as other regional banks, which are sitting on some $620 billion in unrealized losses on all securities (both Available for Sale and Held to Maturity) at the end of last year, according to the Federal Deposit Insurance Corp," continue to experience significant pressure."

How was this allowed to happen? I worked in a British financial institution and do not claim great expertise in the American way of doing things but one flaw in U.S. corporate law allows companies to skew their balance sheet with outmoded accounting methods which maintain asset values at the original level rather than using the more modern, (and better suited to current financial volatility,) mark to market, in which market values current at the closing of an accounting period are used. Thus a company may claim $100 billion in assets against only $75 billion in liabilities, but when assets are calculated to market values only have assets with actual worth of $70 billion thus being insolvent.

 

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