Credit pillar lost in a flash
Apr 4, 2023 | 5min read
Credit Suisse, founded in 1856, was once a guarantor of confidence for its clients, a symbol of Swiss finance, a helper in building up the Swiss monetary system and a source of pride for the Swiss. It is sad that it was acquired by UBS within 72 hours of the crisis at a low price. Credit Suisse, with more than one and a half century of presence in the banking industry, has been shaken by a wave of small and medium-sized bank failures in the United States last month, and has ended up in the need of a takeover.
This incident is a reflection of the fact that a bank's greed for more and more in its investment business can always lead to serious consequences.
“It takes more than one day to freeze three feet of ice." As one of the biggest European banks, Credit Suisse was forced to be sold out just a few days after the crisis broke out.
Rapid interest rates hike quickly led to a liquidity crisis. Banks were forced to sell assets at a cheap valuation. The banking crisis begun with the collapse of Silvergate, a US virtual money bank, and was followed by the collapse of Silicon Valley Bank and Signature Bank within two days of each other earlier last month. To reiterate, the crisis was triggered by a lack of liquidity, which prompted banks to sell their risk-free fixed income assets at cheap prices, resulting in massive losses. The Federal Reserve raised interest rates by 4.75% over the past year, causing banks to devalue their bond holdings. Once bank depositors were forced to withdraw their money, banks were forced to sell their high-quality assets to cash in on the downturn, consequently, they became insolvent and collapsed.
The bank’s management misjudged the situation and was the trigger for the bank's collapse. The causes of the incident were so intricate that it is hard to pinpoint where to begin. Should the responsibility go to the depositors who withdrew the money? Is it possible that the US-China tussle and the Russia-Ukraine war triggered serious inflation, and that the small and medium-sized banks in the US were the ones to blame? Is the Federal Reserve's interest rate hike to 5% in one year another attempt to bring down the banks? In the end, it was a misjudgement of the economic environment by the bank management.
The central bank will not be lenient in raising interest rates. Unfortunately, the management of the banks seemed to be unaware of the risks that these problems can cause and had failed to take precautions against the crisis that lay ahead.
After the Credit Suisse crisis, we believed that the European economy and financial system are problematic and fragile and therefore advise investors to avoid investment in the Euro or European bonds in the near future.
The Credit Suisse crisis had led to another issue; AT1 bond was turned into paper overnight. One of the conditions of the acquisition of Credit Suisse by UBS was that all the CHF 16 billion AT1 bonds held by investors were written off by the Swiss regulator, leaving investors with nothing.
The AT1 bond was also known as a "Contingent Convertible Bond", which meant that it can be converted from debt to equity in the event of an emergency. However, Credit Suisse's 16.3 billion Swiss francs AT1 bond has a clause that states that in the event of any accident, the bond can be converted to zero. This is why investment banks such as Morgan Stanley, JP Morgan, and HSBC, which are full of star investment experts, have accepted the loss in silence. According to Bloomberg news, the biggest victims of the AT1 bond write-offs were PIMCO and INVESCO.
Although current market sentiments may presume interest rates are at its peak, investors should pay attention to the CPI data in the coming months as inflation is not easy to tame.
How should you position your portfolio in view of the situation? Speak to your dedicated WRISE Client Advisor now or connect with us at www.wrise.com
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