By Mona El Wali
On March 17th, Silicon Valley Bank filed for Chapter 11 bankruptcy. Not too long after, Switzerland’s second-largest bank, Credit Suisse, followed suit. Although not utterly destitute, the bank has been facing significant financial challenges and regulatory issues.
Are the two incidents related? Technically, no. Credit Suisse has had very little exposure to Silicon Valley Bank. However, the bank started losing its depositors’ confidence following a wave of panic across the global banking sector. The same wave of panic that is now lapping at the heels of the German giant, Deutsche Bank. Already in a weaker financial position compared to other banks, the crumbling of Credit Suisse has been the result of years of mismanagement. Archegos Capital Management, a now-defunct family office that managed investor Bill Hwang’s personal assets, began Credit Suisse’s journey towards failure. The bank had extended margin loans to Archegos, which by March 2021 could no longer meet its margin calls. This resulted in a loss of 5.5 billion Swiss francs. These losses were compounded by the failure of Greensill Capital, a supply chain finance firm in which Credit Suisse had invested 10 billion Swiss francs in funds, only 70% of which was recovered. Caught up in the wave of panic around the global banking industry and weighed down by scandal and financial losses, the final nail was when Saudi National Bank announced that it would no longer support Credit Suisse.
With support from the Swiss central bank, it was announced on March 19th that Credit Suisse was acquired by UBS for the bargain price of 3 billion Swiss francs. In 2022, Credit Suisse lost 7.3 billion francs and paid over 10 billion francs in fines and penalties for various scandals, including allowing U.S. clients to evade taxes, money laundering and tax fraud in France and enabling a cocaine trafficking gang to launder its profits through the bank for four years, to name a few. Once a giant of Swiss and European banking, Credit Suisse finally succumbed to its wounds. Now the one-time junior, UBS, has taken on Credit Suisse – a move laden with risk.
One of the consequences of the acquisition is that holders of Credit Suisse’s AT1 Bonds, also known as CoCo Bonds, will receive nothing. These bonds are senior to equity but junior to all other bonds and are typically issued by banks in times of trouble. Meaning, in case of bankruptcy, holders of AT1 Bonds would be paid after all depositors and other bondholders get their money, however, they would be paid before equity holders. In this case, holders of these bonds would not receive any payment because the bank’s capital ratio fell below a certain level, leading to the write-down of 17 billion Swiss francs of AT1 Bonds. This is a blow to the 275 billion-dollar AT1 market, and it will make it more expensive for banks to sell CoCo Bonds since they are perceived to be riskier.
The decision to write down the bonds has raised concerns about the holders of the bonds, which could include insurance companies and pension funds seeking high yields when interest rates are low. The dramatic cycle does not end yet as long as individuals are once again paying the price for the bank’s mismanagement and scandals.
In the wake of these problems, Credit Suisse announced that it will be restructuring its business to focus more on wealth management and less on investment banking. This decision, however, underscores the importance of regulatory oversight and the need for banks to act responsibly in the interest of their clients and the broader financial system.
It is difficult to predict, however, whether Deutsche bank and others could eventually suffer the same fate as Credit Suisse. Deutsche Bank has struggled with profitability for years and its ability to absorb losses is weak. Though has taken significant, more successful, has taken steps to address such missteps. The bank has undergone significant restructuring, despite a similar history of scandals and fines such as Credit Suisse’s. Other banks such as Nomura and Mitsubishi UFJ Financial Group in Japan, which also had links to Archegos Capital, have also been forced to take a series of measures to overcome their losses. However, this is not an indicator of future bankruptcy either. In the absence of privileged information and bank transparency, it is difficult to predict such matters. It remains true however that Credit Suisse’s failure has heightened fears internationally.
Credit Suisse’s downfall speaks to the current wider destabilization of the global financial system. Loss of investor confidence, especially with rampant post-Covid growth in the US that is destined to cool down, has had a ripple effect across the industry. Trust in the financial system has remained relatively low following the financial collapse of 2008 and Credit Suisse’s downfall could erode trust in the financial system further. Public viewing of the failure of any bank invariably leads to calls for banking and financial reform. Whilst it may be true as many people around the world struggle to feed themselves, the mantra of “too big to fail” leaves a sour taste in the mouth.
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