Panic, just a little bit of panic, was enough to drive Credit Suisse off a cliff
After the collapse of SVB, investors and the bank’s customers were on high alert for signs of shakiness and Credit Suisse was an obvious target as fears mounted over a wider, 2008-style banking crisis, writes Comment & Features Editor Sascha O’Sullivan
It is panic, a little bit of panic. I believe [it is] completely unwarranted, whether it be for Credit Suisse or the entire market,” said the chairman of the Saudi National Bank, Ammar Al Khudairy, after he said the largest shareholder would not inject any more funds into the Swiss banking giant.
Al Khudairy was right. As many people have noted, extending further funds to Credit Suisse would have been madness. But he was wrong in underestimating the power of just “a little bit of panic”.
The collapse of Silicon Valley Bank was a specific failure, related to a general problem of rising interest rates. It was a bank heavily exposed to the tech sector, which has taken a pummelling over the last six months. It had effectively bet $75bn on interest rates not going up, and when they did, it hurt. When SVB fell, there was a rush to insist it was not “systemically important”.
It was not, as the banks in 2008 were, too big to fail.
In theory, the collapse of SVB should have had little to do with the run on Credit Suisse. The problems Credit Suisse has faced over the last few years are well documented, from the resignation of chief Tidjane Thiam over a corporate spying scandal, to racking up billions of dollars of losses linked to the twin implosions of Archegos and Greensill Capital.
Others familiar with the investment banking division of Credit Suisse point to a much longer history of difficulties, such as the acquisition of Donaldson, Lufkin & Jenrette, when, in the wake of the 1990s Internet Bubble, the bank bought DLJ for nearly three times the firm’s book value, as well as the ill-fated and short-lived reign of John Mack.
But, as of last October, a new chief executive hatched a plan to pull Credit Suisse back from the doldrums and dig itself out of the almighty hole of a decade or two of costly, high-risk decisions.
Switzerland’s banking system was rooting for it to succeed.
The decision from the Swiss National Bank to loan more than $50bn to Credit Suisse was not only a sign of its systemic importance; the intervention also sought to protect the reputation of Swiss banks more broadly.
The move should have shored up enough confidence to tide it over and give it time to implement a long-term solution, like the plan to spin-off its investment banking arm.
But after the collapse of SVB, investors and the bank’s customers were on high alert for signs of shakiness.
While the problems at Credit Suisse were very different to those at the US tech bank, skittish bank-watchers are not entirely rational creatures, and Credit Suisse was duly hit by a flood of outflows and a mass sell-off.
The risk of contagion is, hopefully, limited – markets after all seemed more relaxed than expected yesterday. Sure, there are reputational problems at other banks (as one seasoned investment banking exec put: “Deutsche hasn’t covered itself in glory, and the ex-Barclays CEO was best mates with Jeffrey Epstein”) but they are not systemic in the way the management failures and scandal were at Credit Suisse.
No matter how much they tried to turn over a new leaf, someone always came along with a blow torch.
Some will be keen to stomp on the grave of the Swiss bank, but its wounds should not have meant a sentence to the next available appointment with the guillotine.
It was panic, just a little panic, and people talking themselves into further fear. At Credit Suisse, this fear had enough recent history to feel warranted, even if, in the eyes Al Khudairy, it wasn’t rational.
And there was certainly a lot of gloom in investment banking circles yesterday.
One senior boss at a top US investment firm with offices in London estimated thousands of job losses from the 5,500 Credit Suisse employees in the UK.
The slump in shares in European Banks undoubtedly sounded significant alarm bells. It could be passed off as one of two things: fear or greed. Fear that there are undisclosed problems at other European banks that we don’t know about, or greed because punters are shorting those same banks in case there is a problem nobody knows about. It is most likely the former.
Either way, there are a lot of people looking for the next domino. But we should not let fear drive us into a state of madness.
If panic, a little bit of panic, unwarranted or not, is enough to drive a giant like Credit Suisse to the ground, the same formula, applied to a different set of circumstances could create contagion if it is not stopped in its tracks.