The fallout of Credit Suisse is a classic example of a banking crisis and a financial crisis doesn’t just happen overnight.

If you’ve been following along, you’ll know that Credit Suisse has been having a rough go of things lately. But the good news is, Credit Suisse has finally found its knight in shining armor, and who would have thought that it’s none other than its biggest rival, UBS?

  • What does the fallout of Credit Suisse mean?
  • What happened to the share prices of Credit Suisse?
  • What can we learn from this fallout, and is it related to the failure of SVB?

We will discuss these in this article.

Let’s draw a parallel

Before we talk about Credit Suisse, we need to first understand what happened in the 2008 Global Financial Crisis:

Here’s a summary of the series of important events that happened:

Before the crisis:

  • Housing prices rose rapidly, creating a bubble
  • Banks sold complex financial products like mortgage-backed securities
  • Lax lending standards fueled the boom

During the crisis:

  • Housing market collapsed, leading to defaults and foreclosures
  • Lehman Brothers and AIG faced insolvency
  • Governments intervened with bailouts and stimulus packages
  • Stock markets dropped significantly, triggering a global recession

After the crisis:

  • Countries implemented regulatory reforms to prevent future crises
  • Emerging markets gained more influence
  • Central banks implemented policies to stimulate growth
  • The crisis had political implications, with the rise in populist movements
  • Euro Debt Crisis starts

As you can see, a financial crisis doesn’t happen overnight. If we were to put a timeline, it would be something like below.

What exactly happened to Credit Suisse?

Over the years and most certainly recently, Credit Suisse has been plagued by a series of scandals that have hurt its reputation and caused its share prices to plummet. To make matters worse, the bank’s primary shareholder refused to provide additional capital to help with its liquidity problems, ultimately sealing its fate.

In a surprising (but not really) move, UBS has stepped in to purchase Credit Suisse for merely $3.23 billion, with the support of the Swiss government. It seems that a combination of government intervention and a hefty sum of money was all it took to rescue the struggling bank.

Below is the series of events that happened before the Credit Suisse fallout:

I think below are the most important events:

  • 2014: Credit Suisse pays $2.6B in U.S. tax evasion settlement
  • 2019: Luckin Coffee accounting scandal implicates Credit Suisse as the underwriter
  • 2021: Greensill insolvency causes significant losses for Credit Suisse; Archegos collapse costs Credit Suisse over $5B
  • 2023: SEC inquiry leads to delayed annual report admitting material weaknesses and largest annual loss since 2008

Interestingly, there are striking similarities between the Credit Suisse fallout and Silicon Valley Bank Crisis. Both institutions operate in high-risk industries and prioritize short-term gains over long-term sustainability. Additionally, both banks failed to manage risk effectively, which resulted in significant losses and negatively impacted their share prices.

What Will Happen to Credit Suisse Stock?

UBS’ purchase of Credit Suisse was orchestrated and approved by regulators; the over $3 billion price tag for the deal is a modest price compared with the size of the bank and its assets. UBS officials also said immediately following news of the purchase that they planned to reduce the size of Credit Suisse in the coming years, potentially by selling off parts of the bank, although details remain scarce.

Per the agreement, Credit Suisse shareholders will receive one UBS share for every 22.48 Credit Suisse shares held. Credit Suisse stock will be delisted by the time the deal is completed, likely by the end of 2023. The loss of Credit Suisse shareholders is better than expected, but what shocked the market was the write-off of its $17 billion worth of AT1 bond.

So what happened to the AT1 bond

AT1 bonds are a type of investment that comes with a risk: if regulators believe a bank is in trouble, they can convert the bonds to stock or lower their value.

Usually, when a company collapses, shareholders will bear the losses before bondholders. In the Credit Suisse fallout, Swiss regulators decided to cancel about $17 billion worth of AT1 bonds. This means that investors who put their money in these bonds lost their entire investment before the shareholders.

Below is the list of Credit Suisse bonds being written off. I know quite a lot of Singapore investors have purchased them from the banks and their brokers as there was an SGD tranche. After all, who has believed that Credit Suisse’s bond is not safe?

Frankly speaking, I used to have this bond in my clients’ portfolios but advised all of them to cash out one year ago when Credit Suisse’s trouble started. Nobody suffered the loss.

That is why I always say there is no real buy-and-hold investment, you always have to adapt when the environment changes.

I think this event opened a can of worms as it will increase the instability of the financial market. The market is so angry and confused that even MAS has to step up and reassure that the shareholders should absorb the loss before the bondholders.

This is because many banks have AT1 bonds, including Singapore banks. Below are the list of bonds with “loss absorption features”.

This starts to get technical so I will discuss this more in my next article. Subscribe below to be notified.

Will this trigger another global financial crisis?

At this stage, it is hard to tell. As you can see from this crisis, the regulator played a vital role in controlling systematic risks.

If the regulator chooses not to bail out, it is almost always doomed to fail as we have seen from the 2008 Lehman Brothers fallout.

The other thing we need to take note of is the rate hike. A banking crisis may make the regulators think twice before they continue their rate hikes.

Historically, during times of economic uncertainty, such as the dot-com bust or the Global Currency Crisis, the Fed has typically lowered interest rates to stimulate the economy and stabilize markets.

Conversely, during periods of economic expansion, such as the dot-com boom or the housing market boom, the Fed has often increased interest rates to prevent the economy from overheating and to manage inflation.

This trend has been observed over several decades and is closely monitored by both investors and policymakers.

That’s why if you look at the S&P500 chart below, it seems that the market is already expecting the peak of interest rates hike or even reduction this year.

To summarise…

The recent Credit Suisse fallout serves as a classic example of a banking crisis, where the bank’s series of scandals and failure to manage risk led to significant losses and a plummet in share prices.

This incident had potentially opened a can of worms as it could increase the instability of the financial market. While it is hard to tell if this crisis will trigger another global financial crisis, regulators play a vital role in controlling systematic risks, and the rate hike may be reconsidered during times of economic uncertainty.

There are a lot of lessons to learn. Only if you have a deeper understanding of this banking crisis, can you safeguard our investments and discover investment opportunities as well.

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About the Author

Ivan Guan is the author of the popular book "FIRE Your Retirement". He is an independent financial adviser with more than a decade of knowledge and experience in providing financial advisory services to both individuals and businesses. He specializes in investment planning and portfolio management for early retirement. His blog provides practical financial tips, strategies and resources to help people achieve financial freedom. Follow his Telegram Channel to join the FIRE community.
The views and opinions expressed in this article are those of the author. This does not reflect the official position of any agency, organization, employer or company. Refer to full disclaimers here.

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