California, Zurich and Frankfurt. The current banking crisis has three scenarios: that of the fall of Silicon Valley Bank (SVB) in the United States, that of the collapse of the centenary Credit Suisse in Switzerland and that of the accelerated action of the European Central Bank (ECB) from its German headquarters to avoid a liquidity crisis.
The result of this peculiar episode of terror is a wave of mistrust towards the main European banks, which have spent years preparing for a crisis scenario like that of 2008 and which are now facing their first litmus test. All the alarms are going off and, although it is impossible to know what will happen, a moderation in the rate of interest rate rises is foreseeable and the appearance of economic tensions characteristic precisely of the increase in the price of money. Deposits and the cost of credit can rise without the need for further rate hikes, as if the Credit Suisse crisis already caused the harmful effects. The problem is that you have to control inflation.
The first notice came on Friday, March 10, with the intervention of Silicon Valley Bank (SVB). Individuals and companies that had invested in bank deposits, many of them from the technological world, began to withdraw them in search of liquidity for their businesses. The bank had invested the money, amounting to about 180,000 million euros, in public debt, and had to sell the bonds at full speed to respond to requests. It did so at a steep discount because the bonds were bought at very low interest rates and now, with the Federal Reserve’s hikes, they had lost value. The result was a hole of more than 2,000 million euros, the refusal of shareholders to support a capital increase and their intervention by the US Treasury. Another bank, Signature Bank, also ran into liquidity problems, while a third, First Republic Bank, was bailed out by larger entities.
After delaying its results and exchanging information with the US market supervisor, the SEC, Credit Suisse acknowledged a “material weakness” in its accounts and reported that in 2022 it had lost 7.38 billion euros, adding to the red numbers for 2021. and to those that would be added in 2023. The bank, cornered by reputational problems and lack of transparency, had suffered deposit outflows for an amount close to 125,000 million euros at the end of 2022. The restructuring plan launched at the end of the year past, with 9,000 layoffs and cost savings, it was his last chance to get ahead.
The Saudi National Bank, in a strategy that has turned out to be counterproductive, called a rebuttal by announcing that, after going to a capital increase at the end of last year with which it became the first shareholder of Credit Suisse with almost 10 %, will no longer put more money. The result was a 30% drop in the Swiss bank’s stock market and a collapse of the main European entities, infected with the distrust of the markets.
That same night, Credit Suisse asked the Swiss National Bank for help, which promised to provide the necessary liquidity within a few hours. It didn’t take long for Credit Suisse to figure out 50,000 million euros of the money it needed. It was a way of remaining in the hands of the central bank, after its stock market value had been left at just 7,000 million euros.
The Credit Suisse crisis causes a dilemma for the ECB. Raising interest rates further will reduce liquidity and may stress the financial system, but not doing so is counterproductive at a time marked by high underlying inflation. On Thursday, the body chaired by Christine Lagarde fulfilled its expectations and raised the price of money to 3.5%, but did not offer firm signals about its future steps, in an indication that it will be more lax.
High-net-worth clients have been breaking relations with Credit Suisse all week and the flight of deposits is accelerating, with close to 10,000 million additional euros in a few days. The distrust is absolute and options for the bank are beginning to be considered, among which its sale to Blackrock, Deutsche Bank and UBS stand out. Credit Suisse studies requesting guarantees from the Swiss Government for 6,000 million.
After offering 1,000 million euros, UBS agreed with Credit Suisse to buy the bank for 3,000 million, in an exchange in which shareholders will lose about half the value of the shares. The very Saudi National Bank that caused the crisis is left without the option of complaining because the approval of the shareholders’ meeting will not be necessary. Contrary to the message of the Swiss Government, it is a full-fledged rescue, in which the Swiss National Bank will also guarantee liquidity for 100,000 million euros. The Government also offers a guarantee for possible losses due to doubtful assets of up to 9,000 million. Late last night, the ECB, the Federal Reserve, the Bank of England and other major global central banks put in place a mechanism to ensure immediate liquidity in the global financial system.
In the Credit Suisse bailout, shareholders and buyers of Coco bonds lose especially, which are convertible into shares when the situation is not going well. In other words, the message is that capital will not escape unscathed from this new style of aid, and that makes shareholders seek refuge elsewhere outside of equities. Gold and public debt are trading higher. Credit Suisse falls 60% today on the stock market and drags down the rest of the European entities. Deutsche Bank gives up 10%, ING 9%, BNP Paribas 8% and Intesa Sanpaolo 5%. In Spain, Sabadell fell 7%, compared to 6% for Unicaja or 5% for Santander, Caixabank, BBVA and Bankinter. Spanish banks suffer the punishment after raising their prices in recent months, since the start of the interest rate rises, which takes away some of the drama from the current falls, which should end, if there are no additional surprises, as soon as Credit Suisse’s situation stabilizes and the markets calm down.
It is one of the great doubts. Last week, at the request of the ECB, the Bank of Spain asked national entities to inform it of the level of exposure to Credit Suisse. The answer is that the relationship with investment banking and high net worth is minimal, so that contagion, if it exists, is not direct and is limited to the markets. The delinquency rate is low, so doubts center on the liquidity of the system, since mistrust hinders the ability of banks to capture resources.
Banks’ market capital is one of the variables that are quantified in the buffers required by the ECB for banks in the face of possible financial crises, along with many others. Despite the strong profits in 2022, banks have a lower-than-desired return on the stock market. The cost of capital, which is the rate of return that investors expect to achieve when investing in their shares, is still well below the profitability of the business.
All the large banks easily exceed the ECB’s capital requirements, with a combined margin of more than 45,000 million euros, in the most demanding variable, which is the one that relates high-quality capital to assets weighted by risk. The Bank of Spain has been asking for some time that, given the strong benefits, they do not lower their guard and dedicate part of the profits to raising the provisions. At the same time, he has underlined the solidity of the system.
Among the many differences with the 2008 crisis, which originated from non-payment problems, is the speed with which control and supervision organizations are responding on both sides of the Atlantic. The decisions of the Treasury and the Federal Reserve in the United States have been added to the urgent meetings of the ECB and its willingness to provide liquidity solutions, as well as the rapid action of the Swiss National Bank. This morning, the European Banking Authority (EB) and the Joint Resolution Council (SRB) have joined the messages. They have been preparing for a moment like this for years and now they must show their ability to respond.
Until now, the message was that interest rate rises had not been enough because there was high liquidity in the system. This circumstance also meant that banks did not need money and were reluctant to remunerate deposits. However, the cases of SVB and Credit Suisse have in common the outflow of deposits and liquidity problems. In Europe, the forecast was that, by mid-year, with the end of the special credits from the ECB as a result of the pandemic, the circulation of money would be drastically reduced. However, it seems that the phenomenon will come forward.
Apparently, more than the Europeans, according to a Citi report, which places them among the first in Europe in this variable, thanks precisely to the lines of the ECB. The addendum to the Spanish recovery plan should also help, which includes more than 70,000 million euros of credit lines from Europe, whose arrival in the Spanish economy should take place this year.
One of the consequences of this lack of liquidity should be a kind of forward-looking scenario of interest rate rises, with remuneration for deposits and tightening of credit. This is what should happen without the need for new rate increases. For practical purposes, the situation would have happened anyway, since, had it not been for the Credit Suisse crisis, the ECB would have continued with determination on its path of increases.
The tightening of monetary policy slows down the economy in order to contain inflation. Now it remains to be seen if the former will occur as a result of a banking crisis, which is not very likely at the moment. The ECB studies this situation to see how it acts in relation to the great objective, which is to place inflation at 2%.
In the absence of confirmation and that it consolidates in the monthly average, the daily Euribor has gone from close to 4% to around 3.3%. The indicator, which is formed from the interest at which banks market mortgages, has interest rates as the main reference, and anticipates what they will do. By falling hard, banks are forecasting not many more hikes, or at least that it will take longer to reach the 4% rate scenario initially forecast at the start of the year.
