- The Money Minute
- Credit Sus
Last week we all became banking experts, right? Even if you hadn’t heard of Silicon Valley Bank before last Monday, by the end of the week, you probably had a solid opinion about what had gone wrong with their balance sheets. Which is good. Banking can seem super complicated— and it is. But it is one of the fundamental systems that we all rely on. We trust that when we tap our debit card, our phone, or our watch on the payment portal at the store, our money will be there. But we aren’t manifesting that money with each tap; there is a structure in place that gets our money where and when we need it. There are a lot of questions about how much we can trust those systems as we’ve watched banks around the world struggle. So before we get into those struggles, let's talk about how that system works.
Banks take in deposits and then they loan out that money and invest it. But legally, they are required to have a reasonable amount of cash on-hand at all times to meet the needs of depositors. Our current economic situation is very different than it was even a year ago. As a result of inflation, depositors are spending more on basic purchases and generally doing different things with their money, meaning banks need to keep more cash on hand. Many banks rely on bonds as a way of generating more money, but as the interest rate goes up the market price of those bonds fall.
Let’s double-click on that idea. When you buy a bond directly from the government it costs whatever it costs, let’s say $100, and you earn whatever the current interest rate is. As long as you keep that bond to maturity you will get your $100 back, plus what you made in interest, no matter what happens to the interest rate. But if you need to sell your bond early, it becomes subject to market prices. And the more new bonds pay, the less old bonds are worth. This also means that the bank may have a balance sheet that looks bad because of “unrealized losses” - meaning, the bank would lose money if it sold those bonds right now this very second. Changing market pressures have caused banks to need to have more money on hand, so they may need to sell their bonds before maturity.
This system is all about balance and trust. One report found that there are 190 banks in America with weakness in their books and if those banks are forced to sell their assets prematurely as the result of a bank run they would become insolvent. But before you freak out: if there isn’t a bank run, all the banks in the study would be fine and would remain solvent. So the entire system hangs on everyone being chill.
And in the face of the situation over at Credit Suisse and First Republic, chill is in short supply.
You know all those old jokes about secret Swiss bank accounts? Those jokes are about Credit Suisse. This bank is so bad you can’t spell Suisse without “sus.” Credit Suisse was Europe’s second-largest bank with billions under management, but it had a long history of scandals and mistakes. For years, it marketed itself based on its ability to offer secrecy and help out with a little international tax evasion. And they’ve never been hesitant to get mixed up in a scandal. Credit Sus has been the bank of choice for sketchy situations involving everything from cocaine to tuna fish. But in 2018 it was forced to finally start complying with a 2014 Swiss law that ended banking secrecy. This kicked off a rough time for Credit Sus. In 2020 it became public that the bank was spying on employees. And I don’t mean peeking at their browser history…they were literally having employees followed.
Credit Sus’s problems aren’t new. They have a long history of lousy judgment. They were the favorite bank of many literal World War II nazis. So, net-net, this bank has been on everyone's radar for problematic behavior and a notoriously terrible balance sheet. So when it announced last week that it had “weaknesses” with its financial reporting and the Saudi National Bank refused to lend it any more money, it was not totally unexpected.
The Saudis had already invested $1.5 billion in Credit Suisse last November. They're currently down 80% on that investment. While the Credit Suisse situation is being aggressively managed, it has not stabilized. And unlike SVB— who fell prey to an old-style bank run and some lousy risk assessment— Credit Suisse’s problems are deep and well-established. So, early this week UBS, Switzerland’s largest national bank, bought Credit Suisse for over $3 billion, with the aid of the Swiss government, in an attempt to keep people from freaking out.
To help stabilize the global markets, the Fed and other central banks are increasing the frequency with which they hold swap operations, basically bank-to-bank currency exchanges. The goal of this is to ensure that banks around the world can get access to American dollars. Usually, these swaps are held weekly. Right now they are being held daily in an attempt to bring some chill to the global markets.
The rescue of Credit Suisse isn’t the only one going down. First Republic Bank has a similar profile to SVB in terms of having a real misalignment between the liquidity needs of its customers and the type of fixed investments it made. Unlike SVB it hasn’t been subject to a run and it’s just hanging out being worrisome. So worrisome that Moody’s, a credit score company for financial institutions, dropped First Republic's credit score. While its stock price is down, a group of other banks agreed to deposit $30 billion in First Republic in an attempt to calm everyone down. It didn’t fully work, but the bank is still in operation despite about 40% of total deposits having been pulled from the bank.
All of this moving and shaking in the banking industry makes the Fed decision-making around rate hikes more complicated. The Fed is meeting this week and will announce its latest rate decision on March 22, today. So that’s news I’ll be glued to today. What will the rate change mean for you? I’ll fill you in next time.