Source: Boss Fangtong Dai
Author: degg_GMF

In the cold spring of 1819, in distant Switzerland, a boy named Alfred Escher (Alfred Escher) was born to the most famous local family of Escher von Glass. The history of this family dates back to the 17th century, and many famous entrepreneurs, scholars, and politicians were born under them. Alfred's father was the mayor of Zurich.

Under good education and family care, Alfred's life went smoothly, becoming a member of parliament and vice-chairman of the Swiss House of Commons at the age of less than 30. He is not the kind of second-generation official who hides within the system; on the contrary, as an aggressive liberal, Alfred is convinced of the importance of private ownership to economic and social development.

In the 1840s, trains and railways became the greatest human invention in the steam age, and there was a boom in infrastructure development across the continent of Europe. Switzerland, which is located at the central hub of mainland Europe, should have great potential, but since the Alps span the country, railway construction has faced great difficulties and has been left far behind by other countries.

To motivate domestic enthusiasm, in 1852, young D'Alfred led and promoted a bill that granted the right to build and operate railroads to private companies. The huge profits of private railways are fueling the nerves of the emerging bourgeoisie. In less than 10 years, Swiss railways quickly caught up with powerful countries such as Germany and France.

Railway construction required a large amount of capital, yet Switzerland at the time had not yet fully realized the situation; it could only rely on overseas banks, and capital costs were high. To solve this problem, Alfred personally founded a bank in 1856, named Schweizerische Kreditanstalt, or SKA for short. Over the next 160 years, it continued to expand and acquire, eventually becoming one of the most famous financial groups in the world.

Its name today is Credit Suisse (Credit Suisse).

Many people call Alfred the father of Swiss railways and the founder of modernization and industrialization. Indeed, without Alfred, Switzerland's modernization process could have been greatly delayed. But without large-scale financial support from Credit Suisse, the “roof of Europe” railways could not have expanded so quickly. It can be said that Credit Suisse is the blood producer that took off in Switzerland and is the “hero behind the scenes” of the Swiss industrial system.

In addition to banks and railroads, Alfred was one of the founders of Einstein's alma mater, ETH Zurich. The nation mourned Alfred's death in 1886 during his illness. “Made in Switzerland” author James Breiding wrote: “Swiss people don't worship heroes, but if you go to Zurich's train station, there's a huge statue of Alfred Escher.”

The statue is staring into the distance, and its gaze seems to be able to penetrate the wind and dust of history.But can it see the end of Credit Suisse?

01 The rise of Credit Suisse

What is the most important thing to be a century-old financial giant that crosses cycles? Probablyluck.

The growth of any large financial institution must go through the test of war, bubble, financial crisis, and economic depression. Interest-driven financial institutions can avoid all kinds of holes rooted in human nature. They rely mainly on luck rather than so-called culture, management, and risk control. It just so happens that SKA has always had good luck.

SKA, which was born with a golden spoon, soon became the largest commercial bank in Switzerland with its absolute position in the field of railway finance. However, in the mid-1860s, due to loan and speculative losses, SKA had to undergo a deep restructuring. However, this restructuring also allowed it to escape the European recession of the 1880s without major losses.

Similarly, in 1905, SKA just began expanding its overseas business, but soon after, it was hit by World War I and suffered heavy losses. This made SKA more cautious about overseas business. This kind of prudence allowed it to successfully avoid the Great Depression of the 1930s, which caused countless financial institutions to go bankrupt, as well as World War II.

With a good background and good luck, SKA gradually became the engine for the development of the Swiss economy and became a “must-go” bank for the entire Swiss middle class in the 20th century. With Switzerland's status as a neutral country, SKA also received large inflows of external capital during the two world wars and played an important role in the reconstruction of mainland Europe.

One fate, two fortunes, three feng shui, all let SKA take over.

SKA's global business development has been slow. It wasn't until 1940 that SKA officially opened its branch in New York (it was an office until then), and in 1964, SKA obtained a full New York banking license, and was able to compete with local banks in the United States. In 1982, SKA became the first Swiss bank to obtain a trading seat on the New York Stock Exchange.

The American banking industry in the 1980s belonged to investment banking. With the end of the era of large stagnation and the development of financial liberalization, financial innovations such as commercial paper, asset securitization, and high-yield bonds have sprung up endlessly. SKA has always wanted to enter the investment banking sector, but has been slow to find the right entry point.

In 1988, SKA's partner in the US, First Boston Bank (First Boston) fell into financial difficulties due to extensive investment in high-yield bonds and other reasons. SKA seized the opportunity and completed the acquisition of First Boston in 1990. With this, SKA officially entered the global investment banking industry.

In order to better manage the entire group's business, SKA management established Credit Suisse Holding Group in 1989, which uniformly included subsidiaries such as SKA, First Boston, Credit Suisse Life, and Swiss People's Bank. Over the next decade, Credit Suisse gradually became one of the largest and most well-known banking giants in the world through mergers and acquisitions.

When the 2008 global financial crisis broke out, Lehman, the fourth largest investment bank in the US, fell, Bear Stearn and Merrill Lynch were acquired, Goldman Sachs and Morgan Stanley were forced to become Bank Holding Group (BHC) into the Federal Reserve's regulatory system, and the US (investment) banking industry was hit the hardest since the Great Depression.

Credit Suisse, on the other hand, was spared by its relatively diversified investment portfolio and relatively low risk exposure to subprime mortgage products. Although it also suffered significant losses in 2008 — a loss of 8.2 billion Swiss francs throughout the year — it survived independently without external bailouts (bail-out) from the government. Achieving such business results in 2008 was not easy.

In contrast, as Credit Suisse's biggest local rival, UBS (UBS) suffered losses of more than 40 billion Swiss francs in the global financial crisis. In 2008 alone, it lost 20 billion dollars. In the end, it had to rely on the Swiss government's 60 billion dollar bailout and large-scale layoffs to survive.

In 2009, the haze of the financial crisis still loomed over the global economy, but with its good resilience during the financial crisis, Credit Suisse showed an extraordinary rebound. Its annual return on equity (ROE) exceeded 18%, reaching the highest in the industry, and its capital adequacy ratio also rose to 16%. Compared to other peers, 2008-2009 can be described as a highlight for Credit Suisse.

At this point, the Credit Suisse saga is still almost perfect.

02 Protections and curses

What Switzerland is most proud of is its status as a neutral country.

After Napoleon's defeat in 1815, at the famous Vienna Conference, the European powers confirmed Switzerland's neutral status as a bargaining chip for mutual checks and balances. As a result, Switzerland not only successfully found itself in international political turmoil and military confrontation time and time again, but also received a large amount of international funding to seek safe haven.

Even today, more than 200 years later, the Swiss franc is still regarded as one of the world's most important safe haven currencies. Furthermore, as early as 1934, Switzerland passed a law that determined that it was a serious crime for banks in its country to disclose customer information to the outside world without the customer's permission. As a result, “preserving customer privacy” has become the most famous symbol of the Swiss banking industry, and is favored by the world's rich and certain corrupt elements.

Taking full advantage of Switzerland's unique position, Credit Suisse continues to expand its private banking and wealth management business, and is increasingly regarded as one of the world's financial institutions that place the highest priority on customer security and privacy. “Rich and mysterious” is people's impression of Credit Suisse.

But a focus on privacy often means a lack of regulation. For banks, this is both a blessing and a curse.

In the late 1980s, Credit Suisse was revealed to have helped Philippine dictator Ferdinand Marcos (Ferdinand Marcos) and his wife Imelda Marcos (Imelda Marcos) hide huge sums of money. According to estimates, during Ferdinand's presidency, the Philippines obtained billions of dollars in capital and hid these illegal funds overseas by opening accounts with Credit Suisse under a false name. In 1995, a Zurich court issued verdicts against a number of banks, including Credit Suisse, ordering them to return about 500 million US dollars of illegal funds to the people of the Philippines.

In 1999, the Japanese authorities fined the Japanese branch of Credit Suisse and revoked its license because Credit Suisse Bank employees allegedly participated in the destruction of relevant evidence in the investigation, and the investigation was whether Credit Suisse helped the company cover up its financial losses.

In 2000 and 2004, Credit Suisse was successively involved in cases such as the corruption case of Nigeria's military dictator Sani Abacha (Sani Abacha) and assisting Japan's biggest gang, Yakuza, in money laundering. In 2009, Credit Suisse also paid more than 500 million US dollars in fines for intentionally blocking US financial sanctions against Iran and Sudan from 1995 to 2007.

As time entered the 2010s, Credit Suisse's risk incidents not only did not decline, but instead broke out more frequently.

In 2011, Credit Suisse fell into a scandal for helping more than 1,100 German customers avoid taxes, and finally agreed to pay 150 million euros to reach a settlement with the regulatory authorities. In 2012, the US authorities charged four former Credit Suisse bankers with fraudulently inflating the price of 3 billion subprime bonds during the 2007 subprime mortgage crisis. In the end, one of the managing directors, Kareem Serageldin, was jailed for 30 months. He became the only banker to go to jail during the entire global financial crisis. If you've seen the movie “Big Short,” you're probably very familiar with the picture at the end of the film.

From 2012 to 2016, Credit Suisse helped the Mozambican government issue bonds worth around $1 billion to develop tuna fishing operations in the country. However, the investigation found that most of the money from the issuance went into the pockets of Mozambican officials and some Credit Suisse employees.

According to the investigation, Credit Suisse received a total of 50 million US dollars in bribes throughout the process. In 2021, the case ended with Credit Suisse agreeing to pay $475 million to regulators as a settlement.

In the first half of 2022, Credit Suisse raised about 1.1 billion US dollars in loss provisions in legal litigation, about half of which stemmed from a case 10 years ago. In this 2009 case, Patrice Lescaudron, Credit Suisse's “star employee” in charge of private banking, falsified hundreds of millions of dollars in transactions and caused losses of more than $140 million, even including the former Prime Minister of Georgia among its clients.

Credit Suisse has been stumbling for over ten years, but what really hit it fatally was the epic collapse of the “Path Guide” Fund (Archegos) in March 2021.

03 Fatal Strike

How could a Swiss superbank lose its vitality by a Korean hedge fund?

Behind this is still a bubble created by human nature. In 2020, the global response to the pandemic, the only theme for overseas financial markets was the Federal Reserve's epic easing. Throughout the year, the NASDAQ index rose sharply by 44% in the face of the raging pandemic and the 3% contraction of the US economy, which recorded its best full-year performance since the financial crisis.

Meanwhile, Archegos, a hedge fund, has also established huge long positions on popular stocks through OTC derivatives such as Contract For Difference (Contract For Difference) and Total Return Swap (Total Return Swap).

These derivatives essentially “bet” with investment banks — if stock prices continue to rise, investment banks pay Archegos with excess earnings; when stock prices fall, Archegos needs to pay security deposits to investment banks to cover losses.

For Archegos, the benefit of this is that the leverage ratio can be increased to 4-10 times, and there is no need to file a position report with the SEC, which is equivalent to being hidden from regulatory scrutiny. However, for investment banks, the benefit of this is that they earn a lot of intermediaries and interest expenses from it, while the risk of stocks rising and falling is borne by the other party. If you are rewarded again, you must have courage. Six investment banks, including Goldman Sachs, Morgan Stanley, Nomura, and Credit Suisse, have all become derivatives service providers for Archegos.

However, in late March 2021, a series of events triggered a sharp decline in several heavy-duty stocks of Archegos. Before the opening of the market on March 26, the savvy Goldman Sachs and Morgan Stanley sniffed that Archegos might not be able to pay security deposits, and sold nearly 16 billion US dollars of stock proxy positions through bulk trading before the market. Meanwhile, Nomura and Credit Suisse, which foolishly failed to sell in time, suffered huge losses that were unprecedented.

According to statistics, in the stock massacre on March 26, Archegos lost as much as 10 billion US dollars, setting “the record for the biggest one-day loss in human history.” However, since Archegos has already closed its position, the real loss was shared by Credit Suisse and Nomura. Among them, Credit Suisse became the biggest “culprit” in the entire case, with losses close to 5 billion US dollars.

After the Archegos liquidation incident, an independent external investigation team investigated Credit Suisse's conduct in the Archegos incident and concluded that “Credit Suisse failed to effectively manage risk, but there was no fraud or illegal activity.” The translation of this sentence is “Credit Suisse isn't bad, it's just stupid.”

Unfortunately, in the financial industry, “stupid” ends 100 times worse than “bad.” The Wall Street motto is:Bulls make money, bears make money, pigs get slaughtered — cows can make money, bears can make money, only pigs are destined to be slaughtered.

04 The Decline of the Giants

Can a loss of 5 billion dollars bring down Credit Suisse? Before answering this question, let's first understand how big Credit Suisse really is.

In order to avoid a repetition of the tragedy of the 2008 global financial crisis, the Basel Association and the Global Financial Stability Board (FSB) officially launched the “Global Systemically Important Banks (GSiBs)” list in 2011, which included about 30 of the world's largest and most complex banks that are most important to global financial stability in the strictest supervision.

“GSIB banks are banks that will seriously threaten global financial stability if they go bankrupt”, this is the definition given to GSiBs by the Basel Committee.

There are 5 levels of GSiBs. The larger the bank, or the more complex the relationship with other financial institutions, the higher its level, and the stricter the supervision. Currently, there are no fifth tier banks in the world. JP Morgan Chase (JP Morgan Chase) is the only fourth tier, while Credit Suisse is in the first tier.

Banks at the same level as Credit Suisse also include Morgan Stanley, China's Agricultural Bank, and China Construction Bank. However, although Silicon Valley Bank (SVB), the protagonist of the US banking crisis in March, reached 200 billion US dollars in assets, it is still far from reaching the threshold of a systemically important bank.

By the end of 2022, Credit Suisse's balance sheet was 530 billion US dollars, the scale of asset management reached 1.4 trillion US dollars, and the number of employees worldwide exceeded 50,000. Everyone knows that if Credit Suisse goes bankrupt in a disorderly manner, the impact will be far greater than that of Silicon Valley banks. It's no exaggeration to say that Credit Suisse is “too big to fail” (too big to fail).

In recent years, Credit Suisse Group has split its divisions into four major businesses, including Investment Bank (IB), which began with the acquisition of First Boston Bank; its flagship business in the Asia-Pacific region — Wealth Management (WM); its asset-light business, asset management (AM), where it placed great hopes; and the core business of its ancestor SKA — Swiss Bank, SB).

However, Credit Suisse's four profit divisions have not developed in a balanced manner, and there are huge differences in the profitability of different businesses. Among them, the commercial banking business is Credit Suisse's traditional strength, which steadily brings in about 2 billion Swiss francs of pre-tax profit every year; wealth management is Credit Suisse's star business. It was Credit Suisse's most important source of profit until 2021, but it suffered losses in 2022 due to massive user withdrawals and a decline in global equity bonds.

The asset management business is a new business of Credit Suisse in recent years. The goal is to transform capital to light capital and increase the return on capital, but the scale of profit and asset management is still not obvious. However, it is its investment banking division that has dragged down Credit Suisse's profits the most.

In 2021, Credit Suisse Investment Bank suffered the double impact of the collapse of Archegos and the bankruptcy of its supply chain finance company Greensill. The former caused a loss of 4.3 billion Swiss francs, while the latter caused a loss of around 100 million. In 2022, Credit Suisse Investment Bank once again lost a huge loss of 3.1 billion Swiss francs, mainly due to a sharp decline in fixed income asset and stock sales transaction revenue (down about 40%) and a cliff-style decline in capital market revenue (down 70%). Credit Suisse blames global macroeconomic instability and huge market fluctuations as the main reason for this poor performance.

But Credit Suisse lied. Also in 2022, Credit Suisse's old rival UBS (UBS) achieved net income of 7.6 billion US dollars after tax for the whole year, of which the investment banking sector contributed 1.9 billion US dollars. In fact, in 2022, despite three losses in global equity and debt remittances, the banking industry obtained a very rich net profit through the continued expansion of net interest margin (Net Interest Margin).

Everyone knows that the main reason Credit Suisse is in trouble is that customers are fleeing from Credit Suisse after the Archegos incident.

Moody's report shows that after the Archegos incident in the first quarter of 2021, it can be said that after the Archegos incident in the first quarter of 2021, the revenue of Credit Suisse's investment banking business, whether in the fixed income, equity, or capital markets, declined steadily. However, since 2021, Credit Suisse's total assets have also shown a downward trend year by year — its total assets reached 830 billion US dollars in March 2021, while at the end of 2022 there was only 530 billion dollars left. In less than 2 years, Credit Suisse's stated assets fell by 300 billion US dollars.

Looking at Credit Suisse's stock price again, it's even more unbearable. If you bought a Credit Suisse stock worth 10,000 yuan 5 years ago, its value today is about 500 yuan.

Credit Suisse tried to save itself.

After the 2021 Archegos hold-up incident, Credit Suisse directly fired the head of the investment banking department and the chief risk control officer, making a major change in investment bank management. Since 2022, Credit Suisse has also made comprehensive adjustments to the management of the entire group. In particular, since July 2022, all senior management including the Chief Executive Officer (CEO), Chief Financial Officer (CFO), and Chief Operating Officer (COO) have been replaced. Of course, the reason for this is not only the bank's poor overall financial performance, but there are also frequent internal scandals at senior management level.

In addition, Credit Suisse also announced a strategic transformation in October 2022. It plans to gradually reduce its reliance on investment banking business and invest more resources into asset management businesses that use very little capital but have good profit contributions and huge growth prospects.

In fact, Credit Suisse has been seeking to divest the investment banking division. It announced in November 2022 that it would sell the asset securitization products and services team on its books to Apollo Global Management (Apollo), and plans to spin-off First Boston Bank and go public separately, leaving only the consulting business of light capital in the original investment banking business.

Credit Suisse's plan is to work hard for 3 years to complete the Group's capital-light transformation in 2025. However, this time, luck is not on Credit Suisse's side again like it was 100 years ago.

05 The frenzy of crowding

At the end of September 2022, news suddenly began circulating in the market that Credit Suisse might go bankrupt.

If this rumor were about a big bank with a good reputation and steady operation, investors would probably laugh it off. However, Credit Suisse's fragility was well known, and panic began to spread. On October 4, Credit Suisse's 5-year credit default swap spread (CDS spread), which measures the risk of bankruptcy, soared above 300 basis points. Converted to the point that the market believes that Credit Suisse will not be able to fulfill its debts (that is, bankruptcy) within 5 years is as high as 23%.

The result of the bank panic was invariably a mismatch.

In the fourth quarter of 2022, a large number of companies and financial institutions began rapidly reducing their risk exposure to Credit Suisse. Customers have taken their funds from Credit Suisse, and financial institutions have blacklisted Credit Suisse and are no longer trading funds with it. Credit Suisse's wealth management and investment banking divisions are under intense redemption pressure.

In just one quarter, Credit Suisse's deposits flowed out more than 140 billion US dollars. Its cash and cash equivalents fell from 150 billion to less than 70 billion dollars in the fourth quarter of 2022, a drop of more than 50%, and the liquidity situation deteriorated rapidly.

It is no exaggeration to say that after the 2008 global financial crisis, no global systemically important bank has ever experienced this level of compromise.

Had it not been for Basel III's harsh requirements on the liquidity situation of systemically important banks, and if Credit Suisse hadn't set aside up to 150 billion dollars in cash reserves by 2022, then it probably would have fallen in the fourth quarter of last year.

On the title page of the 2022 earnings report, Credit Suisse Chairman Axel Lehmann wrote, “This past year was the most challenging year in the bank's history.” But Mr. Lehmann may not have anticipated that even greater challenges lie ahead.

Entering March 2023, the otherwise calm global financial market was disrupted by the Bank of Silicon Valley (SVB) of the United States (SVB). On March 10, the US Federal Savings Insurance Company (FDIC) took over SVB with total assets of 200 billion US dollars and ranked 16th in the US at the speed of light. Market sentiment reversed 180 degrees, and the S&P 500 banking index fell sharply by 14% in just 3 trading days from March 8 to March 13.

In the first week of March, the market was still discussing how strong the US economy was, and that the US economy might “not land” (that is, no recession); in the second week, the market began to worry about a resurgence of the financial crisis.

Credit Suisse never dreamed that the big fire that happened on the other side of the world, where it couldn't beat itself, would actually burn on itself in an incredible way.

On March 14, Credit Suisse's auditor PricewaterhouseCoopers stated that Credit Suisse had major flaws in the internal control of financial reports for 2021 and 2022, and issued a “negative opinion” (negative opinion) on this. On March 15, Ammar Al Khudairy (Ammar Al Khudairy), chairman of the Saudi National Bank, the largest shareholder of Credit Suisse, told the media that he refused to increase the capital of Credit Suisse.

Some people think that the original intention of Kudari's statement was to demand that the Swiss government release the maximum shareholding limit for overseas investors not to exceed 10%, but the market, which is extremely weak in sentiment, has its own interpretation: even the majority shareholders have abandoned it; Credit Suisse really won't work this time.

On the same day, Credit Suisse's stock price fell below 2 US dollars, the net market ratio (PB ratio, that is, the ratio of the stock price to the book price of the stock) fell below 0.2, and the 5-year CDS spread exceeded 1000 bps.

On the evening of March 15, the Swiss Central Bank (SNB) and the Swiss Financial Market Supervisory Authority (FINMA) issued a joint statement saying that the problems of some US banks would not pose a direct risk of spread to the Swiss financial market, and that Credit Suisse met the capital and liquidity requirements for systemically important banks. Subsequently, Credit Suisse announced that it would borrow 50 billion Swiss francs (about 53.7 billion US dollars) from the Swiss central bank to strengthen its liquidity reserves.

However, there has been no significant improvement in the situation. On Friday, March 17, the market began rumours that the Swiss government was brokering the acquisition of Credit Suisse by UBS (UBS), the largest bank in the country. As soon as this news came out, the market actually understood that two days over the weekend would determine the fate of Credit Suisse.

According to the market, the government and UBS will inevitably send a large number of auditors and lawyers to check Credit Suisse's books over the weekend. Therefore, if UBS is unable to complete the acquisition of Credit Suisse when the market opens on Monday, it will mean that even with the assistance of the Swiss government and a very close financial review, UBS will still not recognize the intrinsic value of Credit Suisse. What awaits Credit Suisse will be a new round of panic sell-off and return to zero.

It's not shocking. Fifteen years ago, September 13-14, 2008, was also a weekend. Bank of America and Barclays failed to complete the acquisition negotiations for Lehman. In order to avoid the spread of panic after the opening of the market, Lehman announced an application for Chapter 11 bankruptcy protection (Chapter 11 Bankruptcy Protection) before the opening of the Asian market on September 15 (Chapter 11 Bankruptcy Protection), marking the peak of the global financial crisis.

On the third weekend of March 2023, financial markets around the world held their breath.

06 Final negotiations

UBS thinks Credit Suisse is burdensome, and Credit Suisse thinks UBS's prices are low, but apart from the two parties involved, the whole world wants them to get a license to get married quickly.

On Sunday, March 19, there were media reports that UBS's first round price was 1 billion Swiss francs. This price was only 1/10 of Credit Suisse's closing price on Friday, less than half of the annual net profit of Credit Suisse's commercial banking division. Alfred Escher's coffin could not be covered. A few minutes later, this very insulting offer was rejected by Credit Suisse.

On the evening of March 19, UBS finally completed the acquisition of Credit Suisse with shares equivalent to 3 billion Swiss francs. This price is equivalent to 40% off the closing price of Credit Suisse last Friday, which is less than 10% off the book value of Credit Suisse's stock. In addition to this, the Swiss central bank also provided an additional 100 billion Swiss francs in liquidity support, while the Swiss government provided a guarantee of 9 billion Swiss francs. It can be described as a result of the efforts of the whole of Switzerland to complete this giant's takeover of the giant.

UBS reluctantly took this former rival into their pockets. The 167-year-old Credit Suisse, who is 167-year-old, fell to the ground, and global financial markets were temporarily relieved.

The most controversial point in the whole incident came from the Swiss government's announcement of a complete write-off of Credit Suisse's other Tier 1 capital bonds (AT1 CoCo bonds) of about 16 billion Swiss francs. This is not only the biggest CoCo debt write-down in history, but it is also the first time that CoCo debt was completely written off on a priority basis without the equity being completely written off, triggering a sell-off of the entire 300 billion US dollar CoCo bond market.

There are two legal disputes over this operation. First, under the premise of continuing operations (going ahead), can write-down CoCo bonds have priority over equity to absorb losses? Second, on March 15, the Swiss government vowed to assert that there was no problem with Credit Suisse's capital adequacy ratio and liquidity situation, but only 4 days later, it forcibly triggered the “unable to operate” (PONV) clause in Credit Suisse CoCo's bonds and wrote down the CoCo bonds? Is the supervisory authority's judgment fair? Is the practice legal? I'm afraid these disputes will have to be left to court before they can be settled.

Looking back, Credit Suisse is really bad.

On the one hand, its problems are completely different from Silicon Valley banks. The Bank of Silicon Valley went bankrupt because the asset side held a large amount of government-guaranteed housing mortgage securities (Agency MBS), which suffered huge unrealized losses (unrealized losses) under the sharp interest rate hike by the Federal Reserve, accounting for more than 120% of its net capital, while the debt side was mainly dominated by large deposits not protected by deposit insurance, so once it was crowded out and liquidated, it was already insolvent.

Looking at Credit Suisse, the vast majority of securities held by Credit Suisse (about 65 billion US dollars) are measured in transactional financial assets (trading assets). The total amount of securities that can be sold and held until maturity is only 1.7 billion dollars, and unrealized losses account for only 3% of net capital.

On the other hand, even in 2022, which was heavily crowded, Credit Suisse's core capital adequacy ratio (CET 1 ratio) was as high as 14%, not only higher than European regulatory requirements, but also higher than large US banks such as J.P. Morgan, Citi, Bank of America, etc. Until the SVB storm in March of this year, Credit Suisse's various regulatory indicators were higher than external standards.

But Credit Suisse is not at all wrong.

A single risk event wasn't enough to bring down Credit Suisse. However, continuing risk events after the global financial crisis, compounded by the worsening revenue situation in recent years, caused Credit Suisse, especially Credit Suisse's investment banking business, to gradually lose its trust and reputation. This is fatal to financial intermediaries. As Timothy Geithner (Timothy Geithner), who chaired the New York Federal Reserve during the 2008 global financial crisis, recalled in her book “Stress Test”:

“While traditional banks use heavy pillars and high steps to proclaim their stability and safety to depositors, investment banks are located within the imposing Wall Street skyscraper — all of their business is based entirely on customer trust.”

“Without trust, banks would cease to exist.” This is probably the best footnote to Credit Suisse.

07 Bullets are still flying

Since April, the financial market has returned to calm, and just when the market once thought that the banking crisis had passed, panic has once again burnt back to the mainland of the United States.

On April 30, the American Deposit Insurance Corporation (FDIC) announced that it would take over the fourteenth largest bank in the US, First Republic Bank (FRC), which had been in shaky for a month and a half, and sold it to J.P. Morgan Chase (JPM), the nation's largest bank. FRC, a bank famous for providing wealth management services to high-net-worth individuals, also officially succeeded SVB as the second largest commercial bank in US history.

In this takeover case, the purchase price of FRC's loans and securities with a book value of about 210 billion US dollars was only 180 billion US dollars, with a discount rate of 14%, almost entirely due to asset market price losses due to rising interest rates, which directly led to the complete elimination of FRC's shares worth about 19 billion US dollars.

More importantly, the FRC's financial data is actually not fragile. The FRC's quarterly report published 7 days before it was taken over showed that despite a large outflow of its March accounts, as of April 21, its available cash was still able to cover 200% of all of its uninsured deposits.

In other words, even if all of the deposits not covered by deposit insurance flow out, the FRC would theoretically not have a liquidity problem. However, the FRC's bad debt rate and capital adequacy ratio are at a very healthy level, even among regional banks. Even so, FRC was unable to escape the sharp drop in stock prices, being taken over and sold by the FDIC, and the elimination of shareholders' rights.

The FRC's outcome gave all regional bank investors a cold shower of cold water:If a regional bank with sufficient liquidity, high enough asset health, and a stable capital adequacy ratio cannot avoid the fate of being bought and liquidated, then is the bank I'm investing in still safe?

I'm afraid the answer will have to be put a question mark. If that's the case, instead of waiting for others to sell first, it's better for me to sell first. Since May, regional banks, including Western Pacific Bank and Alliance Western Bank, have once again entered a new round of decline.

If the Silicon Valley Bank and Credit Suisse incident in March was a depositors' run (depositors' run), then the aftermath of regional banks since May is that shareholders are fleeing (losing run). The whole market is once again back to “who's next?” In a domino game. There are even regional banks that send mass e-mails to depositors to reassure their depositors. The content is sobering:

“Our shareholders' interests may be nullified, but I assure you that your deposit is safe.”

Unfortunately, even if deposits are safe, if no one wants to invest in regional banks, then what awaits the US is bound to be a series of small and medium-sized bank failures, as well as an economic recession due to credit crunch.

The bullet is still flying in the air, and there's no point in stopping at all. Who will hit next?

08 Epilogue: Fragile and Strong

Looking at it in hindsight, SVB's collapse, Credit Suisse's acquisition, and even First Republic Bank's involvement certainly had operational reasons, the Federal Reserve's aggressive interest rate hike, but there were also reasons for bad luck that cannot be ignored. For example, in the case of SVB, its stock price did not drop drastically at first after it announced that it would close its positions and issue new shares on March 8.

However, the direct trigger for its crowding and takeover was the sudden announcement of voluntary liquidation by the cryptocurrency-friendly bank Silvergate on the same day. This directly triggered cryptocurrency investors and technology companies to panic about SVB, which had a highly similar label, and eventually triggered SVB's lightning-fast collapse.

The SVB crash also led to Signature Bank (Signature Bank) being taken over. The panic spread further to Credit Suisse, where bad news spread frequently, causing Credit Suisse to also be “forced” to be acquired a few days later.

Banks are an interesting business model. No matter how many books and essays you've read about the financial crisis, or how many times you've seen pictures of people lining up at banks during the Great Depression, you'll be amazed at how many financial giants crashed to the ground in just a few days.

The biggest difference between banking and other industries is that it has no middle state, only two extremes (steady state) —Or everyone trusts it and it runs well; or everyone doesn't trust it and it goes bankrupt at the speed of light.

It's not like many industries; it can “develop wretchingly” for a few years when the market is bad and business conditions are poor, and it can endure a few years carrying losses. Look at the mutual benefits of Bearsden, Lehman, and Washington; look at Silicon Valley Bank and Credit Suisse. Often, a bad earnings season or even a bad act simply goes away. First Republic Bank, for example, was profitable until it was acquired.

The classic bank crowding model (Dimond and Dybvig, 1983) tells us that the reason for this phenomenon is that banks use a partial security deposit system, so once someone crowds it out, other people also have to join the crowdfunding team, because whoever is left behind will not be able to get their savings back.

The reality is that what is really weak is not liquidity, not capital, but confidence. Especially today, when the macro environment is highly unstable, information can be spread all over the world within a few seconds, and money transfers can be easily completed on mobile phones.Panic became the cause of panic, the result of panic, and evidence of panic.

Banks all over the world understand that they can only follow the “big but not fail” path if they want to avoid being swayed. Only banks that can give their depositors a red code are worth a higher valuation.

At the end of the article, thank you for reading.

Editor/Somer