The Credit Suisse Effect on European Banks
Concerns over the US banking system in the wake of the failure of Silicon Valley Bank have spilt over into concerns over European banks, principally focused on Credit Suisse.
The issues weighing on Credit Suisse (CS) relating to its investment bank have been apparent for some time, and are not new.
As a result, Credit Suisse is in the process of a deep restructuring process, including the raising of additional capital.
Following a sharp drop in Credit Suisse and European bank shares, underlining the sharp increase in financial market concerns, the Swiss National Bank (SNB) and Swiss regulator FINMA have acted to support CS.
Notably, the SNB has provided CS with liquidity of up to CHF50bn via a covered loan facility of CHF39bn plus a short-term liquidity facility.
Credit Suisse has announced a cash tender offer to buy back CS US dollar bonds for a total of USD2.5bn, plus an additional buyback of EUR500m of CS euro bonds.
Additional announcements and measures to support the US and European banking systems are likely in the coming days. At this point, we do not see a systemic risk to the global banking system.
We continue to monitor this situation closely to assess the potential impact on the macro environment and on financial markets. We will update our market views soon, once we have a more complete view of announced measures.
Credit Suisse (CS) is a Global Systemically Important Bank (G-SIB) that has faced issues in its investment banking division for several years. It has already been restructured and downsized in the past, but the remaining investment bank is still unprofitable. In contrast, the Wealth and Asset Management division is much sounder. CS is looking to turn around its investment banking division. Following the collapse of Silicon Valley Bank in the US and the hit to banking confidence that ensued, there has been a psychological contagion effect in Europe, centred on Credit Suisse. This could trigger an acceleration of client asset and deposit outflows from the bank. The CS share price fell on 15 March by 24% and the CS 5-year Credit Default Swap (a type of bond insurance) surged from around 400bp (4%) to almost 1,000bp (10%).
SNB and FINMA joint statement
In the evening of 15 March, during US market hours, the Swiss National Bank and the FINMA (the Swiss Financial Market Supervisory Authority) confirmed their support.
Firstly, they confirmed that Credit Suisse was well capitalized and solvent; they have been monitoring the bank very closely over the past few years and consider it as “very transparent”. The Swiss bank’s Common Equity Tier 1 (CET1) ratio is 14.1%, among the highest in Europe and other key capital and liquidity ratios are also among the highest. CS has further confirmed that its Liquid Coverage Ratio remains at ca.150%, well above the 100% regulatory minimum.
Secondly, to help Credit Suisse face any liquidity issues, a Covered Loan Facility of up to CHF 50 billion has been agreed with the Swiss National Bank.
CS to buy back bonds
CS has announced a programme to buy back up to CHF 3 billion (USD2.5bn of USD bonds plus EUR0.5bn of euro bonds) of its (now-heavily discounted) debt, to help reinforce its balance sheet. Despite this announcement, concerns remain, particularly around CS’s unprofitable investment banking division.
This has consequently limited the exposure of financial institutions to the CS balance sheet. The Swiss authorities have mentioned they currently see "no indications of a direct risk of contagion for Swiss institutions“.
In our view, the likelihood of a contagion risk from Credit Suisse to other large banks seems quite low at this stage.
Evidently, in the longer term, the market would be more comfortable if CS Investment Banking division’s losses were reversed in a structural manner.
We recall that a European bank bail-in mechanism now exists (post-2008) to convert contingent convertible bonds into equity, and to shore up bank balance sheets if necessary. Additional announcements and measures to support the US and European banking systems are likely in the coming days. At this point, we do not see a systemic risk to the global banking system. We look to update our market views soon, once we have a more complete view of announced measures.