Legal expert commentary by iLead
What are the similarities and differences between the Credit Suisse crisis and the collapse of Silicon Valley Bank？
Both collapsed due to poor internal risk control. Silicon Valley Bank adopted an overly aggressive investment strategy after the pandemic, buying relatively safe US bonds but failing to hedge against the risk of fluctuations in US bond yields, resulting in a bloodbath when US bonds crashed in early 2022.
The Credit Suisse crisis was triggered by a US family fund obtaining huge loans through Credit Suisse and other US investment banks for high-leverage stock speculation, which eventually went bankrupt, causing Credit Suisse to lose $5.5 billion. At the same time, Credit Suisse also invested in a bankrupt supply chain financial company, resulting in a loss of $3 billion.
Both events demonstrate the internal oversight of risk monitoring at Credit Suisse, leading to the dismissal of its chief risk officer and potentially having a ripple effect globally.
On March 22, 2023, BBC Chinese published a special report on the Credit Suisse crisis. The article reads as follows:
The banks collapse too fast. Silicon Valley Bank's crisis was taken over by the government within 48 hours, but the bigger Credit Suisse crisis followed, with the stock price plummeting on Wednesday, March 15th, and the crisis temporarily ending in an epic deal on Sunday, March 19th.
On March 19th, the Swiss Federal Government announced that Credit Suisse would be acquired by UBS Group for a total consideration of CHF 3 billion (approximately USD 3.2 billion). This represents 40% of the market capitalization at the close on March 17th.
Credit Suisse, which was sold at a 60% discount, is 167 years old this year, similar to Lehman Brothers, which was 158 years old when it collapsed, while Silicon Valley Bank, which has just collapsed, is less than 40 years old. What are the similarities and differences in their fate? How did Credit Suisse get to where it is today step by step? And more importantly, how will the aftermath of Credit Suisse affect the world?
· Lessons learned: What three global economic crises in the 20th centuryrevealed
· Why did Chinese capital suffer from the collapse of Silicon ValleyBank.
The reasons for the collapse of both banks have similarities, which is due to poor internal risk management
After the pandemic, the Federal Reserve implemented loose monetary policies, causing Silicon Valley Bank's managed funds to surge. As a result, the bank decided to purchase relatively safe US Treasury bonds to earn some interest. However, at the beginning of 2022, things quickly turned around as the Federal Reserve began to raise interest rates in order to curb persistently high inflation. This move caused a crash in US bonds, leading to significant losses for Silicon Valley Bank. As major customers saw the situation, they began to withdraw their deposits, leading to the bank's collapse. Ultimately, Silicon Valley Bank failed to hedge the risks of fluctuations in US Treasury bond yields when managing its investments.
The Collapse Crisis of Silicon Valley Bank: What are the Follow-up Impacts of the Event and What Does It Mean for the Economy.
The crisis at Credit Suisse was similar but had a longer cycle. The most critical moment was in March 2021, when the well-known "Chinese concept stock crash" occurred. An American family fund, Archegos Capital Management, acquired huge loans through Credit Suisse and several US investment banks to engage in high-leverage stock speculation, eventually leading to a massive loss. The investment banks fled and sold the stocks purchased on behalf of Archegos Capital, but their responses were uneven. Morgan Stanley was the fastest to react, while Credit Suisse was the slowest, suffering the most significant losses, reaching $5.5 billion.
Almost at the same time, Greensill Capital, a supply chain finance company in the UK, also collapsed. Before the collapse, the company continued to lend money and packaged it as financial products for investment. Credit Suisse set up four supply chain finance funds to invest in Greensill Capital's packaged bonds. Through layer upon layer of packaging, the risks were hidden until the eventual collapse, causing Credit Suisse to lose $3 billion.
These events led to the dismissal of Credit Suisse's Chief Risk Officer because both the Greensill Capital and Archegos Capital incidents showed Credit Suisse's internal risk monitoring was inadequate. This was also confirmed in Credit Suisse's recent financial report and became one of the causes of the recent crash.
However, Credit Suisse and Silicon Valley Bank are vastly different in business nature and scale. Despite experiencing massive fund outflows and continuous losses, Credit Suisse still manages assets worth more than CHF 1 trillion, equivalent to $1.1 trillion or Chinese currency RMB 75 trillion. Only 17 countries in the world have a GDP exceeding $1 trillion. Silicon Valley Bank, on the other hand, has around $200 billion in assets.
Credit Suisse is a prominent investment bank, offering various financial services, while Silicon Valley Bank is more like a traditional bank that attracts deposits and offers loans. However, it specializes in serving start-ups and venture capital funds, which are often viewed as high-risk by traditional commercial banks. Silicon Valley Bank tailors its services to these companies, providing loans with returns that sometimes include equity stakes.
On the day Lehman Brothers collapsed on September 15, 2008, employees who lost their jobs walked out of the building. In comparison, Credit Suisse and Lehman Brothers were too similar in many ways.
Credit Suisse was founded in 1856, while Lehman Brothers was founded in 1850. Both had diverse business operations, including wealth management, investment banking and asset management, private equity funds, etc., and were spread all over the world.
In 2008, Lehman Brothers' bankruptcy was the largest bankruptcy case in US history, marking the full outbreak of the 2008 financial crisis. The years-long economic expansion period came to an abrupt end. IMF data showed that emerging economies experienced a sharp slowdown in 2009, with a growth rate of only 2.8%, while developed industrial countries experienced negative growth of -3.4%.
Lehman's collapse was ultimately due to the credit collapse of mortgage-backed securities (MBS). Financial professionals at the time widely regarded MBS as "safe assets" and often used them as collateral for borrowing. They even further amplified leverage through derivatives.
In the Credit Suisse crisis, similar situations could also be seen. High-risk loans issued by "Greensill Capital" were disguised as supply chain finance after being consolidated and were sold to Credit Suisse's clients through the hands of "big and powerful" Credit Suisse, covering up the risks.
The difference is that MBS at the time was widely used in various financial transactions, so its "contagion" was extremely strong. The financial products packaged by Greensill Capital only tricked Credit Suisse.
Secondly, the degree of losses of the two companies is also different. Lehman Brothers had over $600 billion in assets at the time, and losses also exceeded $600 billion. Credit Suisse managed assets of over $1 trillion, and the losses were at the level of tens of billions of dollars.
However, with the collapse of Silicon Valley Bank, the market was like a startled bird. The regulatory authorities in Switzerland, Credit Suisse executives, and Credit Suisse executives all blamed the current banking crisis in the United States for "catalyzing" Credit Suisse's crisis.
Swiss people blame that the current banking crisis in the US has "catalyzed" the crisis of Credit Suisse. In this acquisition, the most damaged were not the Credit Suisse shareholders who were forced to sell at a "four-fold discount," but rather the holders of the "Additional Tier 1" (AT1) bonds issued by Credit Suisse, which amounted to CHF 15.8 billion (USD 17.2 billion), were fully written off to zero, leaving them with nothing.
AT1 bonds were invented after the 2008 financial crisis, and banks issue such bonds to absorb risk. If Tier 1 capital is insufficient, they have to be converted into common stock. They are riskier and offer higher returns than ordinary bonds. However, even so, the payment convention in mergers and acquisitions or bankruptcy liquidation is that bondholders have higher priority than stockholders. In this case, the stocks have not yet reached zero, but the bonds have been fully written off.
Swiss authorities' handling of AT1 bonds has sparked controversy and caused a big drop in AT1 bonds. The size of the entire European AT1 market is only $275 billion, but this time, more than $17 billion was written off at once. Industry insiders believe that this move may increase the future funding costs of the European banking industry.
Immediately afterward, several eurozone regulatory bodies, including the ECB Banking Supervision Bureau, said that "Common Equity Tier 1" (CET1) still bears losses before AT1 bonds, and Credit Suisse may be just an exception.
"In the financial market, real capital is trust," the Wall Street Journal quoted Giovanni Barone Adesi, a finance professor at the University of Switzerland's Italian-speaking area, as saying. Therefore, if people start to lose trust in their financial institutions, everything will quickly collapse.