Western Europe March 16, 2023 / 08:25 am UTC

Credit Suisse: SNB Liquidity and Eurozone Unrealised Bank Bond Losses

By Mike Gallagher

Bottom Line: The SNB are to provide a ChfF50bln loan facility to Credit Sussie and they are to buy $3bln of bank bonds to stabilise wholesale funding jitters. Switzerland is also reported to be examining long-term options to support Credit Suisse, given its domestic systemic importance and after the severe jitters for its equity price and bank bonds on Wednesday. The global significance means that the Fed, ECB, BOE are all also intensely interested and it will heighten speculation that DM central banks will bring an ending to tightening cycles soon.

Figure 1: Global Systematically Important Banks Size Versus Home Country GDP (%)

Source: SNB financial stability report Nov 22 (here

Signals that Credit Suisse major shareholder was not looking to buy extra shares in any future rights issues, plus concerns over last year decline in customer deposits, caused severe jitters across the banking sector on Wednesday. Key points to note

  1. Credit Suisse systemically important to Switzerland. Credit Suisse Swiss operations are one of 5 domestically systemic banks and thus crucial to the function of the Swiss economy. As a first step the SNB has issued a notice of support and provided Chf50bln of liquidity (here). More support in principle will come from the Swiss authorities, it is a question of what cost that will be for shareholders and unsecured bank bond holders. The November 2022 SNB financial stability report looks in detail at the two largest Swiss banks in chapter 4 (here), given that they are classified as global systemically important banks (G-SIB’s) by the Financial Stability Board (FSB) (annual report here) and conducted stress tests in 2022 (here).
  2. UBS bailout 2008 and liquidity backstop. The Swiss government undertook a Chf6bln equity injection for UBS in 2008 during the GFC, with the SNB then leveraging by Chf54bln to allow toxic assets to be moved off balance sheet. Meanwhile, the Swiss government is already due to pass legislation to support the SNB in providing a state backed loan to any of the five domestically important banks if they were to fail (here). Thursday has already seen a Chf50bln loan to Credit Suisse. Bloomberg is reporting that long-term options include a breakup of the bank and ring-fencing the Swiss operations.
  3. ECB interest. Since Credit Suisse is an S-GIB, it is of huge interest to the ECB given the interconnection to S-GIB’s based in the Eurozone and the crisis that occurred in global banking in September to December 2008. The ECB and SNB have close communication and the ECB will likely be up to date on developments. All of this should be a remainder to the ECB that its own tightening is hurting lending prospects (here) and the banking system more than it has admitted up until now. ECSB data shows that EZ banks held bonds worth Eur1.6trn with maturities over 5 years and an extra Eur1.8trn with maturities 2 to 5 years. Unrealized bond losses due to aggressive monetary tightening are an EZ phenomenon as well as a U.S. issue.

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I, Mike Gallagher, the lead analyst declare that the views expressed herein are mine and are clear, fair and not misleading at the time of publication. They have not been influenced by any relationship, either a personal relationship of mine or a relationship of the firm, to any entity described or referred to herein nor to any client of Continuum Economics nor has any inducement been received in relation to those views. I further declare that in the preparation and publication of this report I have at all times followed all relevant Continuum Economics compliance protocols including those reasonably seeking to prevent the receipt or misuse of material non-public information.