A “Too Big To Fail” Bank In Europe Was On The Brink Of Collapse
Do you remember when wealthy people all over the world would stash their money in Swiss banks because there were so strong and so private? Well, the second largest bank in Switzerland was recently on the brink of collapse.
Credit Suisse is a prime candidate to be one of the next dominoes to fall. It has been on very shaky ground for a long time, and now the global banking panic has greatly accelerated the outflow of assets from the bank.
So why should you care if it fails? Unlike Silicon Valley Bank and Signature Bank, Credit Suisse is so critical to the worldwide banking system that it has officially been designated “as being systemically important by the international Financial Stability Board”.
Credit Suisse is one of just 30 global financial institutions designated as being systemically important by the international Financial Stability Board. In other words, it’s too big to fail.
A “too big to fail” bank has not collapsed in more than a decade. If Credit Suisse does go under, the shockwaves will reverberate all over the planet. Even though Credit Suisse is now smaller than it once was, it is still vastly larger than SVB.
Credit Suisse had total assets of $574 billion at the end of 2022 — down 37% from $912 billion at the end of 2020. Its asset-management arm supervises another $1.7 trillion in assets. Those numbers dwarf anything seen at Silicon Valley Bank, which had total assets of $212 billion.
So let us hope that Credit Suisse can be stabilized, because the alternative would be a complete and total nightmare.
Just like SVB, one of the reasons why Credit Suisse is in so much trouble is because it loaded up on government bonds that have now gone down in price dramatically.
The balance-sheet problems that took down SVB are probably even bigger at Credit Suisse. While SVB bought mortgage bonds at 1.5% yields, big European banks were forced to buy sovereign debt at sharply negative yields.
At this point, large European banks are holding mountains of such bonds, and that is truly an existential threat to the entire European banking system.
Unless emergency measures are implemented, a whole bunch of these institutions will inevitably implode.
As for Credit Suisse, the stock price hit yet another brand new all-time record low recently.
Shares of Credit Suisse plunged to a fresh all-time low for the second consecutive day after a top investor in the embattled Swiss bank said it would not be able to provide any more cash due to regulatory restrictions.
Trading in the bank’s plummeting stock was halted several times throughout the morning of March 15, as it fell below 2 Swiss francs ($2.17) for the first time.
There had been hope that Saudi National Bank would come riding to the rescue, but those running Saudi National Bank have ruled that out.
The fresh losses came after the chairman of the bank’s top shareholder, Saudi National Bank, ruled out investing any more into the bank in a Bloomberg interview on March 15. The Saudi bank has just under a 10% stake in Credit Suisse, and crossing that threshold would subject it to new rules.
BREAKING: "Absolutely" not another cent for Credit Suisse. That's what Saudi National Bank, the embattled lender's top shareholder, tells Bloomberg TV in an interview https://t.co/fVEEB8116Z pic.twitter.com/Fy4KdEbfNc
— Bloomberg TV (@BloombergTV) March 15, 2023
After that news broke, Credit Suisse default swaps soared to levels that are absolutely absurd. The cost of insuring the bonds of Credit Suisse Group AG against default in the near-term is approaching a rarely-seen level that typically signals serious investor concerns.
The last recorded quote on pricing source CMAQ stood at 835.9 basis points on March 14. Traders were seeing prices of as high as 1,200 basis points on one-year senior credit-default swaps on March 15 morning, according to two people who saw the quotes and asked not to be named because they aren’t public.
If you can believe it, Credit Suisse default swaps on March 14 were “about 18 times the contract for rival Swiss bank UBS Group AG, and about nine times the equivalent for Deutsche Bank AG”.
That is nuts! But that is where we are. Events have gotten so bad at the bank that employees were reportedly “crying” and having “meltdowns”.
Breaking from a @CreditSuisse employee: “panic, meltdowns, people crying.”
— Charles Gasparino (@CGasparino) March 15, 2023
When your employees are weeping uncontrollably, that is clearly a sign that your days are numbered.
But the good news is that an emergency rescue plan has been announced, and so there is hope that the bank can eventually be stabilized.
Switzerland’s central bank said it was ready to provide financial support to Credit Suisse after shares in the country’s second biggest lender crashed as much as 30%.
In a joint statement with the Swiss financial market regulator FINMA, the Swiss National Bank (SNB) said Credit Suisse (CS) met the “strict capital and liquidity requirements” imposed on banks of importance to the wider financial system. “If necessary, the SNB will provide CS with liquidity,” they said.
Just like the emergency rescue plan that we just witnessed in the United States, this isn’t being called a bailout because people hate that word. But that is what it actually is.
Unfortunately, there are several other European banks that may soon need bailouts as well.
The share price rout renewed a broader sell-off among European lenders, which were already facing significant market turmoil as a result of the Silicon Valley Bank fallout. Some of the biggest decliners included France’s Societe Generale, Spain’s Banco de Sabadell and Germany’s Commerzbank.
Several Italian banks were also subject to automatic trading stoppages, including UniCredit, FinecoBank and Monte dei Paschi.
In the months ahead, analysts expect central banks all over the world to wildly create money in a desperate attempt to prop up their most important financial institutions.
But just because these central banks can create an infinite amount of cash does not mean that they should actually do it.
“There is an infinite amount of cash at the Federal Reserve”
— Wall Street Silver (@WallStreetSilv) March 14, 2023
When you create crazy amounts of money, it leads to crazy amounts of inflation. Just ask Argentina. Right now, they are dealing with a triple-digit inflation rate. Data released in March showed annual inflation surpassed 100% for the first time since the early 1990s, bringing back memories of the hyperinflation that ravaged South America’s second-largest economy.
The United States and Europe are going down the exact same road. And it is a road that we should not be too eager to travel.
In Venezuela, virtually everyone is a “millionaire” thanks to the rampant hyperinflation that has plagued that nation for years. But just about everyone is also living in poverty because the money is almost totally worthless.
Having a stable currency is so important, and the U.S. dollar was once incredibly stable.
Unfortunately, our leaders have been treating our currency like toilet paper for many years, and so it is just a matter of time before it has similar value.
yogaesoteric
May 8, 2023
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