Credit Suisse Collapse ?

Credit Suisse Collapse ?


What’s happening with Credit Suisse?

A lot of questions about the bank arose over the weekend. Here’s a quick dump of thoughts.

Let’s break this down.

Market conditions are tough for banks (especially Credit Suisse). There is a lot of liquidity stress in the interbank lending market. The FRA-OIS indicator has risen quite rapidly over the last two weeks. This in plain English indicates how expensive (or cheap) it will be for banks to borrow in the future.

It also gives you a snapshot of how the market is viewing credit conditions overall. Basically borrowing costs are projected to rise and this appears to be what is being priced in: interest rates are rising, yet economic growth is slowing, which means deteriorating credit quality overall. 

When you apply these conditions to Credit Suisse you can see what’s happening. The market is giving Credit Suisse a hard time.

We all know that its investment banking arm has been hit by multiple scandals, putting earnings at risk. This is significant because the investment bank accounts for a third of the bank’s revenue. 

The structure of its investment bank also doesn’t help. The investment bank has traditionally focused on credit markets and capital markets issuance, which is a tough market to operate in right now. A lot of the investment bank’s recent revenue also came from leveraged finance, M&A, and SPAC deal activity, which are all areas that have declined recently. 

Basically, Credit Suisse needs to restructure its investment bank and it is being punished for it at the worst possible time.

Why did Bear Stearns fail?

Why Lehman Brothers?

What Happened To LTCM?

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However, some people think the panic has become overdone:

Written by James Eagle

Credit Suisse Collapse ?