Credit Suisse, too big to fail?

Credit Suisse this Wednesday triggered fear in the markets of a major banking crisis. The entity, which was down 20% in the mid-afternoon market, would seek public support from the Swiss central bank amid the stock market slump and could be bailed out if its position worsens in the next few hours.

And that is that this financial institution, the second largest in the country, has a “systemic” significance for economy and finance, according to the regulator. However, as Juan Abellán, director of the IEB’s Masters in Financial Markets and Asset Management, points out, a fragmented sale to other competitors could also happen if it is not possible to come to their aid: “Dividing and selling different areas is being considered How is investment banking “We’ll see how it ends,” he says.

Nouriel Roubini himself, who predicted the financial collapse in 2008, expressed doubts about this possible scenario on Wednesday. In your opinion, it is “too big to fail” but “too big to be saved”.

And that is that he Credit Suisse it is not Silicon Valley Bank (BLS). Neither by market niche nor by size. Although SVB specializes in providing services startups technology and its assets amount to almost 200,000 million euros, Credit Suisse has a much more diversified credit and investment business and more than doubled assets, estimated at the end of 2022 at 550,000 million euros. The problems that hid their figures are also of a different nature. Bank of America erred by not diversifying its risks and betting most of its assets on long-term government bonds, running out of cash to deal with deposit outflows now that companies have to turn to them for credit increases. On the contrary, the Credit Suisse crisis accelerated after it admitted that it could have made its accounts and after its largest shareholder, the Saudi National Bank, refused to invest more in the entity: «The answer is absolutely no, for many reasons, the simplest of which is regulatory and legally,” said its president Ammar Al Khudairy. They must not exceed the threshold of 10% of shares.

“Credit Suisse’s situation is not new, last year it already lost up to 1,760 million euros. This year, to the losses of 7,381 million euros (practically in all businesses), we must add financial accounting controversies with the financial authorities of the United States. But the problems don’t end here,” says Abellán.

That is why the possibility of saving is skipped. Should the authorities help Credit Suisse? “No. The rules too big to fail (too big to fail) was made just for those cases, that the bank could fail. I hope it doesn’t come to that, but if Credit Suisse is no longer viable, it should be able to. The rules are designed in such a way that systemically important Swiss banks can step aside and continue to function,” the architect of that scheme slipped in an interview after the financial crisis, Aymo Brunetti.

Despite their reluctance, the Swiss authorities decided to turn on the tap. After a busy day, the Swiss National Bank (SNB) and the Swiss regulator (Finma) announced that they will Rescue Credit Suisse: “If necessary, the SNB will provide liquidity to Credit Suisse,” they concluded in a short joint statement. However, the actual capital needs of the bank are not known.

European banks have more muscle to resist

Apart from the stock market falls accumulated by European banks, dragged down by the Credit Suisse crisis, both believe that the entities can resist: «European banking is more regulated and controlled than regional banks in the United States. In Spanish banks, the majority of public debt portfolios are classified as bonds at amortized cost, that is, with no advance sales and therefore no accounting impact until maturity and, of course, it is not the only asset in the portfolio, as it was in the case of SVB” , explains Abellán, who claims that the banks are “well anchored”.

Despite the similarities that are being drawn with the financial crisis of 2008, Brunetti insists that they are not comparable: «Individual banks are the ones that got into trouble because of their business model and their domestic problems. But as far as we know, we don’t have a structural problem like when very toxic assets were loaded onto the balance sheets of all systemically important banks.”

Complicated ECB decision on interest rates

The stock market crash occurs a day before the meeting of the Governing Council of the European Central Bank (ECB). The body he commanded christine lagarde this Thursday he has to decide whether to raise Interest rates half a point, as planned, or take away the accelerator to prevent credit growth from leaving the economy in the lurch. The situation is extremely complex. The increase brings the specter of recession closer to the euro area, but it is not clear that this could affect the solvency of financial institutions.

Banks in the Eurozone did not, in principle, make the same mistakes as their regional counterparts in the US: high leverage in long-term assets. Moreover, there is a certain consensus about a possible growth of half a point. And there are three reasons that can explain it.

The first relates to the question credibility. The ECB does not want to lead the market to think that the problems of North American banks could be reflected in the Eurozone, where the big challenge for entities in recent years has been the scenario of low interest rates and low profitability. Second, the body must keep the dollar in its rearview mirror, and the euro fell strongly this Wednesday (-1.6%), reaching a practical value parity. The EU does not want the euro to weaken because it would cost much more to import energy (buying in dollars), which is crucial now that the winter gas supply season is starting.

The most urgent problem

The third reason that could push the ECB to raise the benchmark interest rate to 3.5% is that it needs to regain control of inflation urgently. And that is still far from being realized. Germany closed February at 9.3 percent. Far from cooling off, prices have skyrocketed in some cases, such as food, which saw a 21.8 percent increase. In the entire eurozone, inflation closed at 8.5 percent in February.

Whatever decision the ECB takes, the message it sends to the market must be coherent and strong and assure that financial stability is not threatened.