The collapse of several regional US banks is causing turbulence on the financial markets. A massive loss of trust is affecting the second largest Swiss bank, Credit Suisse. With a massive credit line of CHF 50 billion (EUR 50.7 billion), the Swiss National Bank has sent a signal to calm the markets. What's next?
Are there parallels to the 2008/2009 financial crisis?
The collapse of US investment bank Lehman sent shockwaves through the global financial system. Banks had to cope with billions in losses, and trust within the industry eroded. The institutes no longer lent each other money. Many financial institutions were saved from collapse with billions in taxes. However, the now collapsed Silicon Valley Bank (SVB) is significantly less important for the global financial system than Lehman was.
Nevertheless: "The pressure of rising interest rates and falling market values for long-term financial investments is also affecting European banks," said the head of the Institute for Economic Research (ifo), Clemens Fuest, recently. "Credit institutions already weakened by other failures are now at risk of losing the trust of their customers."
Why did CS of all things get into trouble?
Unlike in 2008, it's not about bad loans that are suddenly no longer worth anything and have plunged banks into a liquidity crisis. The troubled bank is well capitalized, but has fallen deep into the red due to poor risk management. She lost a lot of money in the collapse of the Archegos hedge fund and the liquidation of the Greensill funds.
There were also scandals such as the spying on a retiring banker who went to work for a competitor, and court proceedings for involvement in a corruption scandal in Mozambique and money laundering by the Bulgarian mafia. So the trust was already shattered. Now the nervousness after the SVB debacle is hitting the weakest of the big ones.
What distinguishes Credit Suisse from the SVB?
As a niche bank with around 8,500 employees, the SVB had specialized in the financing of start-up companies. It was founded in 1983. CS has been around since 1856, has around 50,000 employees and covers the entire spectrum: deposit and lending business, investment banking, fund transactions and asset management. At the end of 2022, she managed almost 1.3 trillion francs (1.32 trillion euros) of assets.
How big and important is Credit Suisse?
Credit Suisse is the second largest bank in Switzerland after UBS and is also big in international business. With total assets of around CHF 531 billion (EUR 541 billion) at the end of 2022, it is significantly smaller than UBS with USD 1.1 trillion (a good EUR 1.0 trillion) and Deutsche Bank with over EUR 1.3 trillion.
The International Financial Stability Board (FSB) includes them on its list of the 30 systemically important banks in the world, as do the US firms Goldman Sachs and JPMorgan Chase, the French BNP Paribas and Deutsche Bank. These institutes have a strong international network. If such a bank starts to falter financially, it can quickly sweep other institutions down with it.
What has changed since the 2008/2009 financial crisis?
In order to make the industry more crisis-proof, banks now have to have significantly more equity capital with which they can buffer losses in crises. The European Central Bank (ECB) monitors the large institutions in the euro area centrally.
In addition, since 2016 in Europe, if an institution gets into trouble, owners and creditors have been asked to pay first. Deposits from savers and money from a crisis fund financed by the banks (Single Resolution Fund) are only used as a last resort. In the end there were around 66 billion euros. Eurogroup boss Paschal Donohoe is confident that Europe's banks are prepared. "We are aware of the risks that currently exist in our banking and our global financial system. But the level of the capital buffer gives us the certainty that we are able to manage these risks," he told the "Frankfurter Allgemeine Zeitung". ".
How are people's savings secured?
In Germany, savings deposits of up to EUR 100,000 per customer are protected by law in the event of a bank failure. In addition, almost all credit institutions in this country voluntarily secure customer funds - usually far beyond the legal limit. For example, the deposit protection fund of the Association of German Banks applies to private banks. According to him, at least a deposit of at least EUR 750,000 per bank is currently protected per customer. At many institutes, the security limits are even higher. There are comparable regulations for savings banks and cooperative banks.
What does all this have to do with rising interest rates?
As a result of the turnaround in interest rates in the USA and the euro area, there were price losses on the markets for government bonds, for example. Write-downs on securities holdings in bank balance sheets are the result. This becomes a problem especially when banks sell the paper before the end of the maturity period. The SVB was forced to do this in order to offer investors higher interest rates so that they do not withdraw their funds. The SVB recently made a loss of 1.8 billion dollars as a result. "If the securities are held to maturity, which is usually the case with savings banks, then they are repaid 100 percent and the value adjustments made in the meantime are made up for," explained the President of the German Savings Banks and Giro Association, Helmut Schleweis, recently.