Credit Suisse falls prey to a crisis of confidence

One week, two very different banking crises on either side of the Atlantic. The travails of Credit Suisse, the 167-year-old behemoth that has lurched from scandal to scandal, look poles apart from those of Silicon Valley Bank, a US lender considered until very recently the darling of the tech world. SVB began the month with a market capitalisation of $17bn yet has since collapsed, its depositors bailed out. Meanwhile, Credit Suisse limps on, benefiting from an emergency $54bn backstop from the Swiss central bank after its shares cratered to an all-time low this week. But the fate of both banks underscores the febrility of financial markets, where crises are ones of confidence, and adds a new dimension to policymakers’ deliberations as they continue to raise interest rates.

For all of SVB’s market-leading nous in lending to what was meant to be the world’s most innovative client base, its failure can largely be attributed to the fundamental error of not properly managing its interest rate risk. Credit Suisse is not in the same position, not least because as a global, systemically important bank it is subject to tough liquidity and capital rules, and regulators’ stress tests. SVB was not. America’s decision to exempt SVB and its ilk from rules forged in the wake of the last major banking crisis was a mistake.

And yet, the full weight of the Basel Committee’s prudential banking rules have not prevented Credit Suisse from slipping up, again and again. Misdemeanour and intrigue have made it European banking’s whipping boy, a dubious distinction most recently held by Deutsche Bank. Credit Suisse has repeatedly been ensnared in scandals — from Archegos to Greensill Capital to Mozambique “tuna bonds” to name but three. Taken together, these show systematic failures in risk management, which also ultimately hit the bank’s bottom line.

This week’s statement by Credit Suisse on the shakiness of its financial reporting might, at any other time, have been just one more unfortunate episode. At a time when markets were looking for banking’s weakest link, as they were in the wake of SVB’s collapse, it proved potentially existential. Matters deteriorated when Credit Suisse’s anchor shareholder, Saudi National Bank, ruled out further investment. But the reason Credit Suisse has to rely on such unpredictable shareholders is because its more traditional investor base lost patience with its unstoppable flow of bad news. So did depositors, particularly at its top-drawer wealth-management business: there were SFr111bn of outflows in the final three months of 2022. It is in that context that the bank is planning a complex restructuring that would spin off its beleaguered investment bank, cut jobs and beef up its wealth-management unit.

The Swiss National Bank’s backstop has helped, not just with Credit Suisse’s liquidity position but more importantly as a signal to the markets. The bank’s shares rose more than 20 per cent (although they remain down on where they began the week). Arguably, the SNB could have acted a day sooner. But precisely because Credit Suisse’s problems stem from its franchise rather than its balance sheet, it is unclear whether the support will be more than a sticking plaster in the longer term. UBS, Credit Suisse’s rival that had its own misconduct crisis a decade ago, is even touted as a possible white knight. This is because investors are still to be persuaded about Credit Suisse’s overall strategy, or even to see much detail of a restructuring that so far has been too murky, costly and indecisive. Such an approach does little to win confidence. And that, in today’s markets, is what matters most.

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