Because with Credit Suisse there is bank run risk
Bank run risk is real. And Credit Suisse, unlike Silicon Valley Bank, is systemic: its disorderly failure would have very serious repercussions for the European and global banking sector. The comment by Giuseppe Sersale, portfolio manager of Anthilia Capital Partners Sgr.
What happened to Credit Suisse?
That to a tendentious and possibly even surprising question, given that Credit Suisse recapitalised by 4 bln in December, Ammar Al Khudairy, president of Saudi National Bank, the reference shareholder, replied that he did not intend to increase his stake in the Swiss institution .
Open up heaven. The stock began to collapse, reaching losses of 30%. Bonds also collapsed and the Credit Default Swap exploded. The situation has taken on all the connotations of the banking crisis, with questions from regulators on bank exposures in the various jurisdictions, frenetic reductions in counterparty risks, and cross-prohibitions on maintaining relationships.
*CREDIT SUISSE GROUP DEFAULT SWAPS HIT RECORD AMID SVB FALLOUT
*BANKS THAT ARE CREDIT SUISSE TRADE COUNTERPARTIES ACQUIRE CDS
*CREDIT SUISSE CDS REACH CRISIS LEVELS AS BANKS SEEK PROTECTION
*BNP REDUCING COUNTERPARTY EXPOSURE TO CREDIT SUISSE: SOURCES
*BNP STOPS TAKING NOVATIONS ON SWAPS INVOLVING CREDIT SUISSE
*FED WORKING WITH US TREASURY TO REVIEW CREDIT SUISSE EXPOSURES
*ECB OFFICIALS ASKED LENDERS ABOUT CREDIT SUISSE EXPOSURES: WSJ
What is the real situation of Credit Suisse?
Statistically, Credit Suisse's numbers are not bad. Common Equity Tier 1 at 14.1%, liquidity coverage ratio 140%, etc. Nothing particularly worrying. The problem is at the level of confidence, and unfortunately the experience of Silicon Valley Bank has shown how quickly bank deposits can volatilize, when this suddenly decreases. And Credit Suisse has a wealthy and therefore concentrated and non-pulverized clientele.
With the wind blowing, the risk of a bank run is real. And Credit Suisse, unlike SVB, is systemic. Its disorderly failure would have very serious repercussions for the European and global banking sector.
Thus the stock exchanges sank, the banking sector plunged, with double-digit losses for many institutions, and suspensions in bursts, the levels observed on Monday returned to bonds, and, testifying to the change of epicenter of the crisis, the euro has plunged. The macroeconomic implications of such an epilogue were also noted on commodities, with oil falling by 7 percentage points at times.
What to say? The personal impression is that, after the example of SVB, the Swiss authorities will not allow a rapid drift of an institution that certainly has a systemic value. If the situation deteriorates further, they will speak up. I don't have a precise idea of what form the assistance could take, a guarantee for deposits, an assisted takeover by another bank, as it was in Italy for the Venetians, a fragmentation, a partial nationalisation. But I think they will come up with something. This will serve to avoid the systemic crisis and the risk of contagion. But obviously by now the market knows that the banking business is not as thriving as it was believed weeks ago, and I think it is unlikely that the prevailing sentiment until the beginning of March will recur.
Covered by the tensions on the banks, a good amount of US data has also been published:
We had a rebound in weekly mortgage applications, February producer prices were benign, Empire manufacturing in March again looking heavy, and February retail sales which still surprised on the positive side, excluding volatile components. Finally, the confidence of homebuilders has still improved a little, even if I believe it is temporary, and in any case the traffic of prospective buyers is still at 31, well below 50.
The European closure sees losses exceeding 3% for the main core European indices and exceeding 4% for Milan and Madrid, penalized by the greater weight of banks (Eurostoxx banks -8.4%). New collapse of yields, with drops of 20/30 bps everywhere.
The Fed Funds strip only discounts one hike, between March and May (50% probability at each meeting) and the Fed Funds at the end of 2023 still below 4%. Regarding the ECB, which is due to speak tomorrow, the curve discounts 25 bps plus another 25 or so, having removed 100 bps of hikes for 2023 compared to a week ago. Tomorrow's meeting is a tough call. At the last meeting, Lagarde declared that a "rather extreme" scenario was needed to prevent the ECB from raising at a stable rate, ie reproposing the 50 bps. Is the situation extreme enough? Personally, I believe that tomorrow the ECB will moderate its ambitions and settle for raising rates by 25 bps, as a sort of compromise between the hawks and doves on the board.
After the closure, clear signs began to appear that the Swiss authorities are working to stop the drift. We'll see tomorrow what emerges. but risk adversion is easing a bit.
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/credit-suisse-rischio-bank-run/ on Thu, 16 Mar 2023 06:32:20 +0000.