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Are the collapses of Credit Suisse and Silicon Valley Bank connected?

The government bailout of America’s 16th largest bank has increased fears of a renewed financial crisis as alarm bells sound in Europe.

The government bailout of America’s 16th largest bank has increased fears of a renewed financial crisis as alarm bells sound in Europe.
Arnd WiegmannGetty

The Swiss central bank saved the future of one of the most well known credit lenders in Europe, Credit Suisse. Allegations of financial mismanagement came to a head with the release of its 2022 financial report which noted “material weakness” in its internal control over reporting. One of its biggest lenders pulled out its funding after the announcement.

In 2022, the bank closed the fiscal year with a loss of nearly 7.3 billion Swiss francs ($8 billion).

While a rescue plan was found, the scare has many wondering if another financial crisis is on the horizon. The demise of Silicon Valley Bank (SVB) last week could be another indicator of more troubles ahead. Though there are links between the problems faced by the two banks, other individual factors can explain why one is no longer functioning while the other inspired a market rally on Thursday.

What are the similarities between the two?

A major factor involved in the problems for both banks is the interest rate increases that many central banks are undertaking after the covid-19 pandemic. Before 2022 they were set at historic lows; the Federal Reserve could boast of 0.1% rates, making loans very cheap. This made the purchase of usually secure government bonds a very useful backstop for banks

But now interest rates are on the rise. As these increase, to levels not seen tin the last two decades, the price of government bonds falls. The bonds are purchased at a fixed interest rate, making them less attractive as this increases.

However, cheaper government bonds are not a problem if they do not need to be sold. An issue for both banks with this is that they were both suffering from financial black holes and needed to recoup a lot of funds quickly. Thus, the selling of their government bonds was done at a value far below the price when purchased. While this sticking-plaster could be a tactic in the short-term, the lack of forward-thinking worries investors.

And when investors are worried, the take out their money.

This is echoed by the run on the SVB holdings, causing a liquidity crisis, as well as the Saudi National Bank declaring it would no longer by shares in the struggling Swiss lender.

What are the differences in the situations?

While there is similarity in the government bond situation, there remain big differences in the situations between Credit Suisse and SVB. For a start Credit Suisse still survives as a business, while SVB is no longer operating. Deposits in the latter have been secured by the Biden administration, savings billions of investor’s money at the expense of others, while the Swiss central bank stepped in to save Credit Suisse.

“What we’ve seen overnight is the Swiss central bank saying ‘no, we will not let this get into a disorderly collapse’,” Sir John Gieve, former deputy governor at the Bank of England told the BBC.

“I don’t know what the future for Credit Suisse holds but so far they are still standing and it looks like the Swiss central bank will ensure it’s standing long enough to rearrange its affairs for the future.”

Credit Suisse may have a longer lifeline. Its shares recovered to some extent on Thursday after the support from Switzerland’s bank while financial markets also rallied.