The similarities and differences between Credit Suisse and Silicon Valley Bank

Credit Suisse's performance has been declining for a long time due to poor management, and the annual report incident and shareholders' no additional investment has triggered panic. Market concerns about Credit Suisse are not new. In 2021, due to the Archegos liquidation and the Greensill incident, Credit Suisse suffered severe performance losses and caused investors to worry about its investment banking business capabilities. Recently, the release of Credit Suisse's annual report was delayed due to the US SEC's questioning of Credit Suisse's financial statements. At the same time, Credit Suisse stated in its annual report that "major flaws" exist in its internal control of financial information for 2022 and 2021. The auditor PricewaterhouseCoopers issued a "negative opinion" on the effectiveness of its internal governance. The chairman of the National Bank of Saudi Arabia, the largest shareholder of Credit Suisse, said in an interview that he would stop additional investment in Credit Suisse. With negative news, financial report profit losses, and the aftermath of the SVB incident disturbance, Credit Suisse again detonated the market's risk aversion sentiment and concerns about a potential banking crisis.

First, both banks experienced a sharp drop in their stock prices, causing market panic. After the release of the financing announcement on the sale of bond assets and additional stock issuance on March 8 , the stock price of Silicon Valley Bank began to plummet. Its decline in March reached a staggering 63.19%, triggering concerns among American investors about the crisis of small and medium-sized banks in the United States. Credit Suisse's share price also began to plummet after it released its annual report on March 14, falling 34.78% in March. At the same time, Credit Suisse's 5-year CDS basis surged sharply, reflecting market concerns about its solvency. Due to the large scale of Credit Suisse, investors are even worried about the outbreak of the global banking crisis.

Second, both Credit Suisse and Silicon Valley Bank suffered massive losses in deposits. The Silicon Valley Bank incident originated from the enormous loss of deposits of its customers (mainly start-up companies) after the Federal Reserve raised interest rates. As of Q4 2022, SVB's customer deposits are down over $21.3 billion from their Q1 2022 high. According to the latest annual report, Credit Suisse has also encountered deposit outflows. As of Q4 2022, Credit Suisse's client deposits have fallen by more than $179.2 billion from the interim high in Q1 2022. Following the example of SVB, Credit Suisse announced the loss of deposits made investors more nervous.

Third, the government stepped in and bailed out both banks. After the SVB incident started to ferment, the U.S. government acted relatively quickly. On March 10, the FDIC began to take over SVB. On March 13, the Federal Reserve and the U.S. Department of the Treasury issued a joint statement stating they would preserve all deposits in SVB. ? >>). In Europe, the government's actions were equally timely. On March 16, the Swiss National Bank stated that it would provide liquidity support to Credit Suisse if necessary. At the same time, the Swiss government also took the initiative to facilitate the acquisition of Credit Suisse by UBS. The latest news is that on March 19, UBS announced the addition of Credit Suisse for 3 billion Swiss francs.

First, Credit Suisse is a global systemically important bank, much more prominent in scale than Silicon Valley Bank. As of Q4 2022, Credit Suisse's total assets will reach 576.4 billion Swiss francs, far exceeding Silicon Valley Bank's US$211.8 billion. At the same time, Credit Suisse belongs to Tier 1 Global Systemically Important Bank (G-SIB) and is subject to stricter financial supervision than Silicon Valley Bank.

Second, Credit Suisse's "unrealized losses" from losses on bond assets were small. After purchasing U.S. bonds or agency MBS, commercial banks can record them in "trading assets" or "investment securities." Securities investment subjects can be divided into "hold to maturity" (HTM) and "available for sale" (AFS). If the bond is recorded in "Securities Investment," its losses will not be included in the current profit. (However, asset losses under the AFS account are still included in "Other Comprehensive Income" (AOCI). Silicon Valley Bank classifies all its bond assets in the "Securities Investment" account. The unrealized losses of HTM and AFS assets amount to 151.6 billion U.S. dollars and 25.3 billion U.S. dollars.

In contrast, Credit Suisse's "trading assets" scale reached 65.5 billion Swiss francs. In comparison, the "securities investment" scale was only 1.72 billion Swiss francs, of which the unrealized losses of HTM and AFS assets were 40 million and 156 million Swiss francs. Most of Credit Suisse's bond investment losses have been reflected in current profits.

Third, from the perspective of the capital adequacy ratio, Credit Suisse's solvency is still relatively good. Credit Suisse's Tier 1 standard equity capital adequacy ratio (CET 1) and Tier 1 capital adequacy ratio are 14.1% and 20.0%, respectively, which are higher than the minimum regulatory requirements of various countries and are also at a relatively high level among peers. Most importantly, the U.S. commercial bank regulatory reform in 2019 resulted in the exclusion of "other comprehensive income" (including unrealized losses of AFS assets) of small and medium-sized banks (such as Silicon Valley Bank) from being included in Tier 1 capital. Silicon Valley Bank's Tier 1 capital adequacy ratio may be inflated, but Credit Suisse does not have this risk.

In general, although Credit Suisse has a deposit loss phenomenon similar to that of Silicon Valley Bank, it is more stable than Silicon Valley Bank in terms of supervision and implied losses. Credit Suisse's problem lies more in operation, which differs from Silicon Valley Bank's liquidity dilemma. After UBS acquires Credit Suisse, it is expected that Credit Suisse's "crisis" will be curbed and market risk appetite will pick up.

Risk warnings: The pace of Fed rate hikes exceeds expectations; U.S. geopolitical risks; U.S. inflation out of control risks.