Hello and welcome, you are listening to Patrick boil on finance a podcast, exploring ideas, from quantitative Finance examining events occurring in markets right now and financial history to see what lessons can be taken away including interviews with some of the most interesting people in the world of Finance to learn more about the podcast visit on finance dot-org. Look my mom. Always told me if you can't. Say something, nice, say nothing
at all. And for that reason, I try not to say much about Credit Suisse on my channel. But equally, I find when I look at my old videos, I do seem to keep mentioning them and I'm not always nice this morning. I realized that my Mom stole that expression from the Disney film Bambi. She just corrected the grammar a little bit. And I'm not sure that I should go through life following the moral teachings of an animated
rabbit. So I suppose we should once again discuss the goings-on at Credit. Suisse now, most of you who don't live in California, probably first heard of Silicon Valley Bank last week when everything fell apart, but I'm sure you're familiar with Credit. Suisse, it's a big firm. Last time I checked it was the eighth largest publicly listed
Bank in the world by market cap. Oh, Hold on, it's a while since I checked and it seems to have lost around a hundred billion dollars in market cap over the last 15 years, which is bad. And it's actually the 155th largest bank in the world today. So, yeah, it's around the size of Webster, Financial of Stamford Connecticut, which I'm sure is a fine institution,
okay. I can tell from your confused, look, that not all of. You have heard of Webster, Financial of Stamford, Connecticut, Well, what else is there Crocs? You know, those rubber clogs Credit Suisse is a bit smaller than Crocs the company that makes those shoes. So, yeah, Credit Suisse. Maybe they could diversify into the flip-flop industry and eventually be bigger than Crocs, who knows?
Anyhow. It hasn't been a great week for Credit. Suisse its biggest investor was asked earlier this week if he would buy more stock in the bank. I upload a journalist and he replied, absolutely not. Here's the clip. And the answer is absolutely not for many reasons. I'll side the simplest reason, which is Regulatory and statuary. We now, own 9.8 percent of the bank, if we go above 10%, all kinds of new rules kick in.
Now, I think if he had said, I'd love to, but I'm restricted by various regulations from doing so. Things, might have gone a little bit better. Lutely not was absolutely, not the best thing to say, at a time. When people are eyeing banks with suspicion, so that wording caused some Jitters and the stock price fell as much as Twenty Eight percent in the biggest one-day sell-off in the stock on record leaving it down
more than 75 percent. Over the last year, it's bonds fell to levels that signal financial distress which Securities do in 2026 dropping by 70 cents on the dollar, the move sparked, a sell-off in both European and US Bank. Stocks. As investors were already on edge due to the bank runs last week in the United States. Now, I'm not sure if it's true but I'm hearing the rumor that David jamaat and Jason have invited.
Amar the big Saudi investor to join the All In podcast as sparking Bank runs has become their new thing. Now that no one's interested in. Facts or blitzscale startups anymore. So Credit Suisse bounce back yesterday after receiving a fifty four billion dollar loan from the Swiss Central Bank and instantly announcing plans to buy back about three billion dollars worth of their dead to boost liquidity and calm investors so far.
There's been no mention of expanding into the horrible Footwear Market. I did mock up this clog in Photoshop for Them to try and help out. I'm not that good at Photoshop but I just figured that it might be helpful. Now, the Swiss National Bank act giving this credit line to Credit, Suisse obviously indicates a few things firstly that there's no need for a run on the bank as there will be enough money for all depositors.
Secondly, it signals that the Swiss National Bank and swiss Regulators have examined, the bank and the fact that they're willing to make this loan indicates that they I think that things are okay at Credit Suisse and thirdly if Credit Suisse can buy back a lot of its debt at a discount. This will show us a profit in their accounts for all its candles and mistakes. Credit Suisse did have a strong and liquid balance sheet as of Wednesday.
Now we've seen a few big issues with banks over the last week. The most notable ones being Silicon Valley Bank and Credit. Suisse these crises are very different to each But they are still somewhat linked. Silicon Valley Banks. Failure can mostly be explained by their failure to properly.
Manage their interest rate risk. Credit Suisse is in a very different position partially because it's classified as a, global systemically important Banks, and it's subject to tough liquidity rules Capital rules and stress tests which as VB was exempt from, but all of the Prudential banking rules might have Event a Credit Suisse from the financial problems that Silicon Valley Bank succumb to but Credit. Suisse has instead been plagued by repeated scandals from spying
on a former employee. A criminal conviction for allowing drug dealers to launder money massive leak of client data. To the media are key goes green. Sill, Mozambique tuna, bonds, the list is too long. You would maybe even think that this willingness to break laws and skirt regulations. Add to the prophets at Credit Suisse but no they've managed to be involved in every Scandal and always lose money. On a serious note though.
These scandals show systemic failures in risk management at the farm which destroyed the bank's reputation and ultimately hit the firm's Bottom Line Credit Suisse released their annual report on Tuesday. Announcing in it that management did not design and maintain an effective. Risk assessment process to identify and analyze the risk of material misstatement in its financial statement. Going on to say that it's full year 2022, results were
unaffected by this. So while the situations are very different at Silicon Valley bank and credit Suite, they're both huge failures of risk management. The loss of reputation at Credit Suisse over the years has led to an exodus of their most talented staff. Off the best Bankers, don't want to walk around with credit Suite printed on their business card. It doesn't help to attract business and it does nothing for their resumes. The bad reputation will have equally made it more difficult
to attract any new business. Why would someone choose to deal with Credit? Suisse, when there are other reputable banks that they could do business with wealth management, customers appear to have lost fade in The Firm to the wealth management business. Business suffered from over a hundred million dollars in outflows in the final quarter of 2022. The actions of the Swiss National Bank mean, the disaster has been averted for the time being but Credit, Suisse is possibly still critically
wounded their bond slid further. Yesterday, one of their dollar bonds maturing in 2027, gave up its gains to trade down almost five percent on the day to 66 cents on the dollar and Their dollar Bond maturing in 2028 sled 13 percent to just below 64
cents. These Bond, declines came despite a rebound in the bank shares on Thursday, prices below 70 cents on the dollar are generally considered to be a marker of distress, the same bonds had been trading in the 80s and 90s respectively as recently as Monday this week, some of the share price recovery was possibly driven by Sean. Recovering as the short thesis is a lot weaker now that the Swiss National Bank is back stopping the firm.
There are a number of reasons to believe that the European banking system is in much better shape to whether the stresses of the current banking environment than the u.s. regional Banks of similar size as Don Davies of front-line analysts. Argues, in the Ft, this is not because European banks are very
good. It's precisely because they Historically been quite bad, a regulatory filing published by the French Bank. BNP power bar on Tuesday, shows that its profit and loss account, has very little sensitivity to interest rate movement, the Spanish Bank BBVA.
As another example, has hardly any sensitivity of its shareholder funds to interest rate, as Davies points out practically every banking regulation, in existence, at a time when things went badly wrong and Europe, spent a decade toughening up banking regulation, because it went through a rolling multi-year, Euro crisis, the European Regulators. Have a detailed set of standards for testing interest rate risk with the idea that they'll be
applied to every significant Bank in Europe, unrealized losses are not ignored under this regime and the global basil standards on stable funding. Are applied across the entire banking sector. This is quite different to the regulator's applied to Community Banks, in the United States, who lobbied the government for regulatory exemptions over. The years, European banks have underperformed US Banks. Since the credit crunch, largely driven by this additional regulatory burden that they face.
But the idea is that if Regulators are going to agree to bail out Banks, from time to time, Time. They should reasonably put restrictions in place as to how
much risk. These banks are allowed to take the economist Matthew Klein argued in a blog post earlier this week that Banks today can be seen as speculative investment funds grafted on top of critical infrastructure and that this structure is designed to extract subsidies from the rest of society, by threatening civilians would crises if the banks bet are ever allowed. Fail.
He goes on to argue that the US government's response to the collapses of Silicon Valley Bank and Signature Bank, effectively removing the cap on Deposit Insurance. While letting lenders borrow relatively cheaply against fictitious asset values, is a reminder that those threats usually work. Now while credit, suisse's balance sheet was reasonably strong. Unlike the u.s. banks that collapsed last week. His reputation was obviously not the unending list of scandals.
Most of them coming from the farm, Senior Management and its Investment Banking division have destroyed the ones impressive brand, this loss of reputation has driven away the top talent and the firm's customers collapsing profitability. We've seen this week that, this profitability issue in a climate of fear can put a firm like credit Suite on the Rocks. So what might Happen. Next with the Swiss National Bank back in Credit Suisse and with its balance sheet and
decent order. It seems highly unlikely that liquidity issues will sink the ship. This makes a Silicon Valley Bank style Bank Run way less likely but while the central bank can provide liquidity it can't provide a good business model and that's what Credit Suisse need customers. Have to see a good reason as to why they should choose to deal with.
A tarnished brand like Credit Suisse the Swiss National Bank does have the tools to prevent an immediate bank failure, but the management of credit Suite has to find a way of turning around the firm's reputation and its profitability which are linked for investors. The bank's liquidity is not its fundamental problem. Instead, they worried that its business model is simply unprofitable. The current CEO has been in Israel for less than a year.
And it's a difficult path ahead of him in October. He announced a restructuring plan to cut costs, reduce the size of the workforce and sell part of the securitized products unit to Pimco and Apollo. He additionally outlined plans to spin off the capital markets and advisory business over the next three years under a rejuvinated CS first.
Boston Brand the options on the table if things continue in their current Action include tearing up this restructuring plan spinning off its with unit, a full takeover by another bank or in a worst case scenario the resolution of the bank in a call with clients on Wednesday, JPMorgan analyst key in Abu Hussein said that at Credit Suisse is most likely Destiny was a takeover by its Swiss rifle UPS. Now, a merger between Switzerland's, two largest
banks. Been discussed for quite some time but has been seen as unlikely for antitrust reasons. The current situation has led to speculation that such a takeover could occur. If Regulators felt it was the best way of stabilizing, one of the country's most important financial institutions under a more extreme scenario. Some are arguing that the Central Bank could step into guarantee the deposit take full control of the business. Sell it off in pieces and wind the rest down.
This would be politically difficult, especially if Swiss taxpayers were to take a hit, not to mention the embarrassment of one of the country's biggest companies being brought down. So, anyhow my suggestion for credit Suite, which I feel is a good one is less banking, more rubber clogs. It works for the Crocs people and it's the banking thing that seems to keep getting Credit. Suisse Bubble. Thanks for tuning in to the podcast.
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