Banking ‘crisis’ update: some relief for Credit Suisse (CS)
- On Wednesday night, the Swiss National Bank (SNB) came out with a statement including that ‘Credit Suisse meets the capital and liquidity requirements imposed on systemically important banks. If necessary, the SNB will provide CS with liquidity.’
- CS’s US share price rose by almost 20% after the announcement.
- On Thursday morning, Credit Suisse announced it is borrowing up to 50 billion francs from the Swiss National Bank to ‘strengthen its liquidity.’
- The Chairman of the Saudi National Bank, which triggered a 25% sell-off in Credit Suisse’s stock prices after stating it won’t invest more funds into the lender because of regulation, told CNBC the panic is ‘unwarranted.’
Even though it is positive that Credit Suisse can get support from its central bank in such a short time frame, it raises questions about its liquidity position. Why did Credit Suisse decide to borrow up to CHF 50 billion to shore up liquidity the morning after the SNB stated that the company meets the capital and liquidity requirements imposed on systemically important banks? We can only guess that this is a precautionary measure to convince markets it has the firing power to counter its depleted equity capital and to limit further contagion.
While the root of their despair is quite different, Credit Suisse shares a couple of deeply-worrying characteristics with Silicon Valley Bank (SVB): lack of trust and deposit outflows. This means that while the liquidity position of Credit Suisse may be much better than that of SVB and its interest rate sensitivity is much lower – CS’s unrealized losses are peanuts compared to the size of its balance sheet – the company could find itself in the same awkward position soon.
As you can tell from the chart above, Credit Suisse deposits plummeted in the final quarter of last year. Company deposits fell by a whopping 140 billion Swiss Franc or 37%. And even though Credit Suisse has stated that it had deposit inflows since the start of the year, this will likely reverse. Which compliance officer will allow you to park your money or do business at an institution that could be on the brink of collapse? Learning how much Credit Suisse’s deposits have suffered during the latest episode of anxiety will be key.
Will the ECB and Fed blink?
Based on the latest CPI report, the Federal Reserve has no option but to continue hiking rates. If the Fed decides to pause or stop hiking after the collapse of SVB and Signature Bank, this may be interpreted as a signal that it panicked, even though Powell and colleagues rushed to launch the Bank Term Funding Program almost instantly.
If market volatility drops after the recent central bank interventions, we expect the Fed to raise rates by 25 basis points, with a big disclaimer that it stands ready to act if the banking crisis worsens. There’s a reasonable chance the Fed will postpone the intended rate hike to the next meeting to buy itself more time. However, markets pricing the first rate cut as early as June is misplaced. Another stand-off between Powell and markets looms.
Concerning the ECB, we expect a 25 bps rate hike but do not entirely rule out a 50 bps rate hike. With the Swiss National Bank stepping in and emphasizing that CS has no real liquidity issues at this time, it would raise questions if the ECB steps down from its inflation-fighting efforts. Not in the least because Lagarde has a bigger inflation problem than her colleague on the other side of the Atlantic.
We remain underweight equities and other risky assets.
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