This is an opinion piece by our Analyst Team.
So after the on-going Silicon Valley Bank debacle – something we’ve all been obsessing over during the last week or so – we’ve also been having to deal with the “who’s next?” media excitement.
Cue the hundreds of opinion posts around the world asking whether Credit Suisse is really “too big to fail”. The resounding answer is, well, yes. It is too big to fail, because it’s connected absolutely all over the place. This is how the banking system works. Once you’re of sufficient scale, there is no way to easily go back – and why should you? Shareholders certainly won’t support this. CS has money here, there and everywhere. UBS has money here, there and everywhere. NatWest has money here, there and everywhere. Switch off a bank – a big, systemically important bank – and you will very quickly realise just how far-reaching the connectivity can be.
In today’s hyper-hyper-connected world, things have got a lot more…. exciting dangerous. In fact until last week we’d never seen the utterly compelling and hugely problematic effects of what many referred to as a “Twitter Bank Run“. $42 billion was removed from Silicon Valley Bank in 10 hours.
There were countless posts across LinkedIn (where most of the bankers and banking-connected community lives) highlighting the reality that if no one had said anything about Silicon Valley Bank’s situation, there is a very strong likelihood it would still be operating perfectly fine today.
We all tend to forget the “promise to pay the bearer” concept that first underpinned the whole concept of modern banking. Trust. It’s fundamentally all about trust.
Let us pause for an educational video from Bart Simpson illustrating how this works…
This morning CNN and everyone else on the planet reported that the Swiss Central Bank had publicly announced that it will be supporting Credit Suisse with $54 billion of liquidity if needed:
Credit Suisse shares surged Thursday after the Swiss central bank agreed to loan the bank up to 50 billion francs ($54 billion) to bolster confidence in the country’s second-biggest lender and blunt concerns about the international financial system following the collapse of two U.S. banks.
The fascinating and rather predictable result was… the Credit Suisse share price recovered. Shock horror. AP reports they shot up 33% and settled back at 25%. Why? Well, the Central Bank effectively said there isn’t a problem.
Here’s the internal dialogue that many have been having with themselves:
“Yes, but what if they’ve got no liquidity, I better move my money,”
– “But they do.”
“Ah, right but what if they don’t?”
– “But they do. The Central Bank said so.”
“Oh, so there’s no problem?”
– “No.”
“But what if I try and withdraw my money and they can’t pay?”
– “But they can. The Central Bank’s given them access to the funds if they need it.”
“Oh, so there’s no problem?”
– “No.”
“Ok.”
This is the kind of thing you need to do to shore up the trust in the system. The sort of thing that didn’t happen to Silicon Valley Bank (for a whole set of reasons!)
So: Can we all relax now?