Credit Suisse and Silicon Valley Bank Collapses Explained

By: Dan Cooper

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The Swiss Central Bank Saves Credit Suisse

Recently, the Swiss central bank came to the rescue of Credit Suisse, saving the future of one of Europe’s best-known credit lenders. The bank was facing allegations of financial mismanagement, which came to a head with the release of its 2022 financial report. The report noted a “material weakness” in its internal control over reporting, and one of its biggest lenders withdrew its funding after the announcement.

In 2022, Credit Suisse ended the fiscal year with a loss of nearly 7.3 billion Swiss francs ($8 billion). While a bailout plan was found, the scare has many wondering if another financial crisis is on the horizon.

Link Between Credit Suisse and Silicon Valley Bank

The demise of Silicon Valley Bank (SVB) last week could be another indicator of more trouble ahead. Although there are links between the problems facing the two banks, other individual factors may explain why one is no longer functioning while the other inspired a market rally on Thursday.

Interest Rate Increases and Government Bonds

A significant factor involved in the problems of both banks is the interest rate increases that many central banks are making after the covid-19 pandemic. Historical lows were established before 2022, and as the Federal Reserve could boast rates of 0.1%, borrowing was very cheap. This made buying government bonds a useful bolster for banks.

But now interest rates are on the rise, to levels not seen in the last two decades, the price of government bonds falls. Cheaper government bonds, however, are not a problem if they don’t need to be sold. One problem for both banks with this is that they were both suffering from financial black holes and needed to recover a large amount of funds quickly. Therefore, selling government bonds at a value well below the purchase price was necessary.

Differences in the Situations of Credit Suisse and SVB

While there are similarities in the situation for government bonds, there are still big differences in the situations of Credit Suisse and SVB. Deposits in SVB have been insured by the Biden administration, saving billions of investors’ money at the expense of others, while the Swiss central bank stepped in to save Credit Suisse.

Credit Suisse still survives as a business, and its shares rallied somewhat on Thursday after support from the Bank of Switzerland, while financial markets also rallied.

Conclusion

The Swiss central bank’s intervention has saved Credit Suisse from a potentially disastrous future. While there may be more trouble ahead for the banking industry, for now, Credit Suisse can reorganize its affairs and move forward with a stronger footing. The market rally shows that there is still hope for the banking industry as a whole.

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