Credit Suisse : Crisis throws up more questions than answers
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Credit Suisse : Crisis throws up more questions than answers

The takeover of Credit Suisse by UBS will likely have wider ramifications for credit markets in the future. It raises many questions relating to the magnitude of Credit Suisse’s problems, the motivations of those decision-makers that engineered the solution, and the efficacy of resolution tools designed to provide well-defined and orderly resolutions to distressed banks

Credit Suisse’s downfall was different to the recent Silicon Valley Bank (SVB) default and those bank resolutions of the Global Financial Crisis (GFC). Typically, bank resolutions stem from problems with their assets: the loans they make (eg mortgages and corporate lending) or financial instruments they own (eg government and corporate bonds, asset-backed securities and mortgage-backed securities). When a bank’s assets become impaired – meaning they are lower in value than what they paid for them – and they are forced to sell such assets at a realised loss, problems can ensue.

A bank “unwind” often follows a typical script. “Asset-side” problems become apparent to depositors and other banks alike. Depositors withdraw their savings and other banks withdraw their lending – or at least require additional “good” collateral to be posted against the lending provided to the problem bank. The bank is then required to sell assets, often quickly in a fire-sale scenario, which crystallises these losses and generates a black-hole on its balance sheet. SVB had a typical asset-side problem where its liabilities (company deposits, many of which were uninsured and more flighty) were invested in long-duration assets which had subsequently fallen, a victim of the US Federal Reserve’s 2022-23 hiking cycle. Where SVB differed from the bank resolutions of the GFC was the speed of its decline. Social media means that news and information – sometimes speculative or with little substance – moves more quickly today. Concerns about banks can spread like wildfire, as was the case for SVB. Technology allows deposits to be withdrawn (almost) instantly via an app, meaning bank-runs involving slow-moving queues outside bank branches are now a thing of yesteryear. At face value, Credit Suisse was different to SVB as it did not exhibit an asset-side problem. Core Equity Tier 1 (CET1) – a measure of a bank’s risk-based capital and overall financial health – was last reported at 14% with a comfortable buffer to regulatory minimum requirements. Assets held were perceived to be “clean”, partly due to a more conservative risk management approach attributable to heightened regulatory scrutiny following recent high-profile scandals (Archegos, Greensill). The Swiss National Bank (SNB) also provided CHF50 billion in available liquidity – a move that should have provided confidence that Credit Suisse’s assets were sound. Even in the days prior to the announcement of UBS’s takeover, the SNB stated that Credit Suisse “meets the capital and liquidity requirements imposed on systemically important banks”.

Credit Suisse appears to be a domino knocked over by problems at SVB and other US regional banks. Commentators worried about contagion and questioned whether any European banks could be vulnerable. Credit Suisse – with its recent issues and need to restructure its investment bank – was targeted and in common with SVB such concerns caught the imagination of the masses in an incredibly short space of time. Credit Suisse depositors, wealth management clients and lenders could maintain existing exposure to the bank – something that may be reasonable given the bank’s apparent clean bill of health – or they could withdraw deposits and reduce their exposure just in case the speculation was right. If everyone else withdrew their deposits but they did not, this could result in an unfortunate outcome, particularly where deposits were uninsured.

Controversy over AT1 instruments
As part of the UBS-Credit Suisse solution, the SNB took the controversial decision to permanently write-down to zero CHF16 billion in Additional Tier 1 (AT1) instruments. AT1 provides banks with additional equity-like capital and can be written down or converted into equity in the event that a bank’s CET1 ratio falls to a certain level (generally 7%, but for some instruments as low as 5.125%) or is declared non-viable. The fact that the AT1 instruments were written down is not necessarily controversial. This is what they are designed to do. However, the fact there was no mention of a capital shortfall or balance sheet losses, and Swiss authorities had to amend the law over a weekend to define a bank needing the provision of government backed liquidity as a non-viable bank, has been controversial.

This also has ramifications because it is commonly thought that the non-viability test is based on capitalisation, not the provision of liquidity by the central bank. Here equity holders also received CHF3 billion as part of the deal. AT1s are senior to equity holders in the creditor waterfall and this controversial decision has sparked  a strong reaction among many bondholders. So, if CET1 at 14% comfortably exceeded the trigger level and Credit Suisse’s assets were sound, why were AT1s written down to zero? And if AT1s are senior to equity and worth zero, surely the equity value is also zero?

Unanswered questions
What seems clear is that Swiss authorities found there was a need to find a resolution quickly and that a Swiss solution (ie UBS) was preferrable. Many questions remain unanswered: if Credit Suisse’s capital was fine, as the SNB had claimed days earlier, and given SNB’s willingness to provide Credit Suisse with liquidity (cash provided in exchange for Credit Suisse’s assets), then why didn’t Credit Suisse weather the storm and meet depositor outflows with the ample liquidity available? Maybe a capital hole was discovered? While possible, this seems strange given the tight regulatory oversight and the clean bill of health the SNB had given Credit Suisse only days earlier. Were there concerns around wealth management outflows leading to a permanent impairment of its wealth management business? Could this cause damage to Switzerland’s reputation as a safe wealth management hub, one which is an extremely important contributor to the Swiss economy? Would UBS be unwilling to buy Credit Suisse unless the terms were too-good-to-be-true? Was the write-down of CHF16 billion of CET1 plus the promise of additional backstops in exchange for CHF3 billion the required solution to get the deal done? Could Credit Suisse’s board only accept UBS’s takeover if some value was available to shareholders? Did the authorities just get spooked?

Moves to ease broader AT1 concerns
Following the AT1 write-down, other European countries and the UK have distanced themselves from the actions of Swiss authorities, with the European Banking Authority stating that “common equity instruments are the first ones to absorb losses, and only after their full use would Additional Tier One be required to be written down.” However, credit spreads on AT1s at the time of writing remain materially wider (the Bank of America Contingent Capital index is +168bps or +43% wider during March) and pricing on most AT1 instruments now assume a low likelihood of being called at their first call date, indicating the market does not consider Swiss actions a one-off decision made independently by Swiss authorities with no read across to other jurisdictions.

The price action raises further questions about the future of AT1s as an asset class. If the instruments did not trigger due to a capital issue (as was intended) but for other reasons in a resolution scenario, are the instruments fit for purpose and can investors be confident in owning them in the future, and at what price will they be willing to do so? Assuming the answer is no, this means we may see a higher cost of capital in the banking sector in future and banks may be required to hold more common equity instead.

Investors to demand a higher risk premia?
At the very least, the Credit Suisse situation suggests future bank unwinds will follow a different script. In a world where information is widespread and technology enables money to be moved quickly, maintaining confidence around a bank’s health is paramount. In today’s world a sound capital position and access to central bank liquidity may not be enough to save a bank. Given this, a higher risk premia may be required for investors providing funding to the sector.

27 März 2023
Ryan Staszewski
Ryan Staszewski
Portfolio Manager, Investment Grade Credit
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Credit Suisse : Crisis throws up more questions than answers

1Wall Street Journal, Fed Chairman Jerome Powell at the WSJ Future of Everything Festival, 17 May 2022
2Wall Street Journal, Apple Makes Plans to Move Production Out of China, 3 December 2022
3Bloomberg, as at February 2023
4Bloomberg, Chinese National Bureau of Statistics, 2022
5https://www.scmp.com/economy/china-economy/article/3163411/china-gdp-economic-growth-tipped-slow-amid-coronavirus
6The Diplomat, What the 20th Party Congress Report Tells Us About China’s AI Ambitions, 5 November 2022
7https://www.bp.com/en/global/corporate/news-and-insights/press-releases/bps-position-in-russia.html
8Bloomberg, China’s $150 Billion Chip Push Has Hit a Dutch Snag, 20 January 2021
9CNBC, Huawei posts first-ever yearly revenue decline as US sanctions continue to bite, but profit surges, 28 March 2022

Important Information

For use by professional clients and/or equivalent investor types in your jurisdiction (not to be used with or passed on to retail clients). For marketing purposes.

This document is intended for informational purposes only and should not be considered representative of any particular investment. This should not be considered an offer or solicitation to buy or sell any securities or other financial instruments, or to provide investment advice or services. Investing involves risk including the risk of loss of principal. Your capital is at risk.  Market risk may affect a single issuer, sector of the economy, industry or the market as a whole. The value of investments is not guaranteed, and therefore an investor may not get back the amount invested. International investing involves certain risks and volatility due to potential political, economic or currency fluctuations and different financial and accounting standards. The securities included herein are for illustrative purposes only, subject to change and should not be construed as a recommendation to buy or sell. Securities discussed may or may not prove profitable. The views expressed are as of the date given, may change as market or other conditions change and may differ from views expressed by other Columbia Threadneedle Investments (Columbia Threadneedle) associates or affiliates. Actual investments or investment decisions made by Columbia Threadneedle and its affiliates, whether for its own account or on behalf of clients, may not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not take into consideration individual investor circumstances. Investment decisions should always be made based on an investor’s specific financial needs, objectives, goals, time horizon and risk tolerance. Asset classes described may not be suitable for all investors. Past performance does not guarantee future results, and no forecast should be considered a guarantee either. Information and opinions provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. This document and its contents have not been reviewed by any regulatory authority.


In Australia:
Issued by Threadneedle Investments Singapore (Pte.) Limited [“TIS”], ARBN 600 027 414.  TIS is exempt from the requirement to hold an Australian financial services licence under the Corporations Act 2001 (Cth) and relies on Class Order 03/1102 in respect of the financial services it provides to wholesale clients in Australia. This document should only be distributed in Australia to “wholesale clients” as defined in Section 761G of the Corporations Act.  TIS is regulated in Singapore (Registration number: 201101559W) by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289), which differ from Australian laws.

In Singapore: Issued by Threadneedle Investments Singapore (Pte.) Limited, 3 Killiney Road, #07-07, Winsland House 1, Singapore 239519, which is regulated in Singapore by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289). Registration number: 201101559W. This advertisement has not been reviewed by the Monetary Authority of Singapore.

In Hong Kong: Issued by Threadneedle Portfolio Services Hong Kong Limited 天利投資管理香港有限公司. Unit 3004, Two Exchange Square, 8 Connaught Place, Hong Kong, which is licensed by the Securities and Futures Commission (“SFC”) to conduct Type 1 regulated activities (CE:AQA779). Registered in Hong Kong under the Companies Ordinance (Chapter 622), No. 1173058.

In Japan: Issued by Columbia Threadneedle Investments Japan Co., Ltd. Financial Instruments Business Operator, The Director-General of Kanto Local Finance Bureau (FIBO) No.3281, and a member of Japan Investment Advisers Association and Type II Financial Instruments Firms Association.

In the UK: Issued by Threadneedle Asset Management Limited, No. 573204 and/or Columbia Threadneedle Management Limited, No. 517895, both registered in England and Wales and authorised and regulated in the UK by the Financial Conduct Authority.

In the EEA: Issued by Threadneedle Management Luxembourg S.A., registered with the Registre de Commerce et des Sociétés (Luxembourg), No. B 110242 and/or Columbia Threadneedle Netherlands B.V., regulated by the Dutch Authority for the Financial Markets (AFM), registered No. 08068841.

In Switzerland: Issued by Threadneedle Portfolio Services AG, an unregulated Swiss firm or Columbia Threadneedle Management (Swiss) GmbH, acting as representative office of Columbia Threadneedle Management Limited, authorised and regulated by the Swiss Financial Market Supervisory Authority (FINMA).

In the Middle East: This document is distributed by Columbia Threadneedle Investments (ME) Limited, which is regulated by the Dubai Financial Services Authority (DFSA).  For Distributors: This document is intended to provide distributors with information about Group products and services and is not for further distribution. For Institutional Clients: The information in this document is not intended as financial advice and is only intended for persons with appropriate investment knowledge and who meet the regulatory criteria to be classified as a Professional Client or Market Counterparties and no other Person should act upon it.

 

This document may be made available to you by an affiliated company which is part of the Columbia Threadneedle Investments group of companies: Columbia Threadneedle Management Limited in the UK; Columbia Threadneedle Netherlands B.V., regulated by the Dutch Authority for the Financial Markets (AFM), registered No. 08068841.


Columbia Threadneedle Investments is the global brand name of the Columbia and Threadneedle group of companies.

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Important Information

For use by professional clients and/or equivalent investor types in your jurisdiction (not to be used with or passed on to retail clients). For marketing purposes.

This document is intended for informational purposes only and should not be considered representative of any particular investment. This should not be considered an offer or solicitation to buy or sell any securities or other financial instruments, or to provide investment advice or services. Investing involves risk including the risk of loss of principal. Your capital is at risk.  Market risk may affect a single issuer, sector of the economy, industry or the market as a whole. The value of investments is not guaranteed, and therefore an investor may not get back the amount invested. International investing involves certain risks and volatility due to potential political, economic or currency fluctuations and different financial and accounting standards. The securities included herein are for illustrative purposes only, subject to change and should not be construed as a recommendation to buy or sell. Securities discussed may or may not prove profitable. The views expressed are as of the date given, may change as market or other conditions change and may differ from views expressed by other Columbia Threadneedle Investments (Columbia Threadneedle) associates or affiliates. Actual investments or investment decisions made by Columbia Threadneedle and its affiliates, whether for its own account or on behalf of clients, may not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not take into consideration individual investor circumstances. Investment decisions should always be made based on an investor’s specific financial needs, objectives, goals, time horizon and risk tolerance. Asset classes described may not be suitable for all investors. Past performance does not guarantee future results, and no forecast should be considered a guarantee either. Information and opinions provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. This document and its contents have not been reviewed by any regulatory authority.


In Australia:
Issued by Threadneedle Investments Singapore (Pte.) Limited [“TIS”], ARBN 600 027 414.  TIS is exempt from the requirement to hold an Australian financial services licence under the Corporations Act 2001 (Cth) and relies on Class Order 03/1102 in respect of the financial services it provides to wholesale clients in Australia. This document should only be distributed in Australia to “wholesale clients” as defined in Section 761G of the Corporations Act.  TIS is regulated in Singapore (Registration number: 201101559W) by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289), which differ from Australian laws.

In Singapore: Issued by Threadneedle Investments Singapore (Pte.) Limited, 3 Killiney Road, #07-07, Winsland House 1, Singapore 239519, which is regulated in Singapore by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289). Registration number: 201101559W. This advertisement has not been reviewed by the Monetary Authority of Singapore.

In Hong Kong: Issued by Threadneedle Portfolio Services Hong Kong Limited 天利投資管理香港有限公司. Unit 3004, Two Exchange Square, 8 Connaught Place, Hong Kong, which is licensed by the Securities and Futures Commission (“SFC”) to conduct Type 1 regulated activities (CE:AQA779). Registered in Hong Kong under the Companies Ordinance (Chapter 622), No. 1173058.

In Japan: Issued by Columbia Threadneedle Investments Japan Co., Ltd. Financial Instruments Business Operator, The Director-General of Kanto Local Finance Bureau (FIBO) No.3281, and a member of Japan Investment Advisers Association and Type II Financial Instruments Firms Association.

In the UK: Issued by Threadneedle Asset Management Limited, No. 573204 and/or Columbia Threadneedle Management Limited, No. 517895, both registered in England and Wales and authorised and regulated in the UK by the Financial Conduct Authority.

In the EEA: Issued by Threadneedle Management Luxembourg S.A., registered with the Registre de Commerce et des Sociétés (Luxembourg), No. B 110242 and/or Columbia Threadneedle Netherlands B.V., regulated by the Dutch Authority for the Financial Markets (AFM), registered No. 08068841.

In Switzerland: Issued by Threadneedle Portfolio Services AG, an unregulated Swiss firm or Columbia Threadneedle Management (Swiss) GmbH, acting as representative office of Columbia Threadneedle Management Limited, authorised and regulated by the Swiss Financial Market Supervisory Authority (FINMA).

In the Middle East: This document is distributed by Columbia Threadneedle Investments (ME) Limited, which is regulated by the Dubai Financial Services Authority (DFSA).  For Distributors: This document is intended to provide distributors with information about Group products and services and is not for further distribution. For Institutional Clients: The information in this document is not intended as financial advice and is only intended for persons with appropriate investment knowledge and who meet the regulatory criteria to be classified as a Professional Client or Market Counterparties and no other Person should act upon it.

 

This document may be made available to you by an affiliated company which is part of the Columbia Threadneedle Investments group of companies: Columbia Threadneedle Management Limited in the UK; Columbia Threadneedle Netherlands B.V., regulated by the Dutch Authority for the Financial Markets (AFM), registered No. 08068841.


Columbia Threadneedle Investments is the global brand name of the Columbia and Threadneedle group of companies.

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