BANKING SECTOR DISTRESS

Only a couple of weeks after the anniversary of the start of Russia’s all-out war against Ukraine (February 24), another shock started to unfold for the global economy: increasing banking distress in the United States and its contagion effects. The events surrounding the collapse of three U.S. banks brought back memories of the Global Financial Crisis of 2007-8. The case of Silicon Valley Bank motivated the U.S. authorities to take bold action to tackle any systemic risks proactively.

Nevertheless, the current market turbulence cannot be compared with that of 16 years ago. Banks today are in much better shape in terms of capital and liquidity on both sides of the Atlantic than back then. Regulation is well advanced, and fallback and liability solutions or resolution mechanisms ensure the most controlled and coordinated approach to failing institutions. In addition, a significant paradigm shift has occurred since the fall of Lehman Brothers (September 15, 2008), characterized by an interventionist policy. A case like Credit Suisse, like a carelessly discarded cigarette in the forest, can quickly develop into a conflagration if hesitant action is taken; supervisory authorities would rather ensure that the situation calms down as soon as possible by taking bold action.

Credit Suisse always fulfilled the special regulations applicable to systemically relevant banks regarding capital ratios and liquidity requirements. When investors’ and depositors’ suspicions about the health of the bank first emerged, Swiss authorities provided CHF 50 billion to Credit Suisse. This was intended to dispel doubts about the liquidity situation and prevent the turbulence from spreading to other market participants.

A core problem of the turmoil was the bond portfolios, which came under pressure during aggressive monetary policy normalization and have thus become “underwater” in the banks’ books. Although their price losses do not have to be recorded in the results in the case of “hold to maturity,” a necessary freeing up of liquidity in the case of a massive withdrawal of customer deposits may make it necessary to uncover these losses. The Swiss authorities aimed to break a negative spiral, restore confidence in the institution or the markets, and prevent a possible domino effect from the outset.

However, the creeping loss of confidence at Credit Suisse had been going on for some time. This has resulted from years of corporate restructuring measures, during which the bank was more concerned with itself, which led to an exodus of employees, and an unclear strategy concerning the investment banking division, which is already weakening due to the Russo-Ukraine war and a lack of deals. Poor internal control systems also led to the CHF 4.4 billion debacle regarding the bankruptcy of the U.S. hedge fund Archegos Capital in 2021. In the previous year, Credit Suisse posted a loss of CHF 7.3 bln and reported an outflow of client funds worth CHF 111 bln in the final quarter of 2022 alone.

Eventually, as an emergency solution, Credit Suisse was taken over by rival Swiss bank UBS. The transaction aimed to halt the ongoing loss of confidence and prevent serious negative consequences with unforeseeable