Credit Suisse: fear of contagion – Economy
The thing with the weekends is now reminiscent of that financial crisis fifteen years ago: Even back then, in 2008, politicians and supervisors were often able to save themselves on Saturday and the trading break on the stock markets, in order to then hurry to find a fallback solution for the respective bank by Sunday night – before the markets in Asia open and everything would be dragged into the abyss. This is not only happening at various financial institutions in the USA, but also at HypoRealEstate in Munich, at IKB in Düsseldorf and at SachsenLB in Leipzig.
Also at the CreditSuisse (CS) needed a quick solution over the weekend. Because it quickly became clear that the rescue offer from the Swiss National Bank (SNB), after all a credit line of CHF 50 billion, would not calm the markets. The SNB’s assertion that the bank was stable and did not need the help at all no longer seemed credible.
The share price recovered only briefly afterwards, only to fall again to a worryingly low level by Friday evening, and the prices for credit default insurance on Credit Suisse – an important crisis indicator – continued to shoot up. Numerous other banks let it be known that they no longer do business with CS. According to the Swiss media, several international central banks then made massive threats to those responsible in Switzerland: They would forbid their banks to continue doing business with CS if the ailing bank was not rescued over the weekend.
Now it comes down to an emergency takeover by the competitor UBS. What the solution looks like was not clear on Sunday evening. But how can the panic be explained? How important is Credit Suisse for the international banking system, for the global economy?
On the one hand, the Swiss bank is not exactly a giant; with total assets of 535 billion francs, only slightly larger than Commerzbank. In addition, most other banks are likely to have long since dissolved their business relationships with the scandalous bank. Nevertheless, it is considered systemically important. So it’s big enough that anything that doesn’t look like a controlled solution would lead to major turbulence on the financial markets at the beginning of the week.
This can probably best be explained by the highly nervous situation on the markets, triggered by the collapse of California’s Silicon Valley Bank a week ago. It had speculated on the bond markets and collapsed after many clients from the start-up industry suddenly withdrew their funds there. At the same time, the authorities had to close a second financial institution, Signature Bank from New York. Queues had already formed in front of the ATMs there – pictures that were shared in large numbers on social media and also fueled the panic there. US President Joe Biden felt compelled to declare American savings safe.
“This is the price we are already paying for years of loose monetary policy”
In such a situation there are psychological contagion effects – even if the banks are perhaps not intertwined with each other. “If I see that a bank that is similar to my bank goes bankrupt, I prefer to withdraw my deposits from my bank,” says Martin Hellwig, an economist and banking expert from the Max Planck Institute, the SZ. For many years he has been criticizing the inadequate consequences of the financial crisis and is calling for higher capital buffers for banks to prevent precisely such domino effects.
In fact, there is currently a great deal of uncertainty on the financial markets as to what the consequences of inflation and the associated rapid rise in key interest rates will really be – not only for the banks, but above all for them Economy. Will a severe recession follow after all? The turnaround in interest rates finally marks the end of the days when cheap money was almost in abundance and debt was not a problem. Times in which even companies with shaky business models could survive for a long time.
While shaky mortgage loans caused the system to collapse during the financial crisis fifteen years ago, it is now also companies, especially in the USA, that have accumulated an unprecedented mountain of debt. The market for risky corporate loans has more than doubled in the past ten years. And no one knows exactly where these debts are, in the bank balance sheets or in the so-called shadow banking sector, i.e. in funds and other pools of capital – apart from strict regulation? “This is the price we are already paying for years of easy monetary policy,” wrote Larry Fink, head of the world’s largest wealth manager Blackrock, in his annual letter to investors. It was inevitable that some banks would now cut back on lending to stabilize their balance sheets. And Larry Fink is certain: “The markets remain nervous.”
British pension funds narrowly escaped a “Lehman moment” in the autumn
Most banks have come through the interest rate turnaround, war and energy shock comparatively well – also thanks to the state aid for the real economy. In addition, higher key interest rates are initially good for the banks’ core business. On the other hand, many financial institutions have large stocks of low-interest bonds on their books, which are now worth less. If they have to sell the securities before maturity, they incur high losses. On the stock exchanges, the share prices of many European financial institutions are trading dangerously low, indicating that investors do not trust their balance sheets.
In addition, the current crisis did not come overnight: in the autumn, British pension funds only narrowly escaped a “Lehman moment”. Only the intervention of the British central bank prevented its collapse. They too had not adequately hedged against interest rate increases. “It’s a very fragile situation,” said Andrea Enria, head of European banking supervision, at the beginning of the year. He was already worried about the very problem that was now fatal to the SVB and Credit Suisse: that customers and investors were withdrawing their money in droves.
The question remains as to what conclusions the central banks will draw from the situation: Inflation is still high, which is why the central banks around the world have already announced that they will raise key interest rates further. The trouble at the banks should now make it much more difficult for them. Because it may be precisely these interest rate hikes that could cause problems for some banks and the economy. And it is no coincidence that before last week’s ECB Council meeting, the voices were raised again to postpone a further tightening of monetary policy or at least to let it be smaller. The ECB initially stood its ground and increased the key interest rate. But can she stay the course now?