Chaos theory proposes that a butterfly flapping its wings in one place can cause a tornado in another. Similarly, the recent failure of a niche California US tech lender this week pushed an unrelated Swiss bank close to collapse. Time for central bankers to acknowledge that with risks unpredictable, rate policy must be more cautious.
The crash of Silicon Valley Bank and a financial crisis at Credit Suisse were reactions to globally rising rates and connected via contagious panic.
This forced the Swiss lender to go cap in hand to the Swiss National Bank 350 metres down the street in Zurich. The SNB has put up SFr50bn ($54bn) in extra liquidity. Presumably, some big counterparties were shunning Credit Suisse despite a tolerable liquidity coverage ratio.
A reason would be slumps in the price of Credit Suisse senior bonds. One soon-maturing dollar bond with a 3.8 per cent coupon was at peak stress yielding a theoretical 150 per cent according to Refinitiv. That would explain why the bank has trumpeted the repurchase of SFr3bn of bonds.
Disaster has been averted. But Credit Suisse appears critically wounded. That bond was still yielding a notional 87 per cent on Thursday morning. The one-year credit default swap, which fell 1,000 basis points, remained very high at 2,900. Shares jumped 23 per cent but did not recoup fully the week’s drop.
None of this will reassure clients of the key wealth management arm or their suave advisers. Deposit outflows will continue.
Credit Suisse says it will continue with a complex restructuring. The market and the SNB will be the judges of that, one suspects.
A cleaner rejig is needed, perhaps involving UBS. The aim should be to split off the relatively stable Swiss retail bank. Revenues there — 32 per cent of the group — fell about a tenth to SFr3.7bn in the year to end 2022. On a peer group average of 7 times earnings it could still conservatively be worth SFr9bn. Even after Thursday’s jump, that exceeds the market value of the whole group.
Western central bankers have meanwhile established that their current rate trajectory is breaching a pain threshold for the financial system. Potential bank collapses must now counterweight the ill-effects of inflation in their thinking. That is good for the dollar, gold and commodities — and bad for ordinary consumers.