I. What happened
a) Self-fulfilling prophecy
It all started with a self-fulfilling prophecy launched by venture capitalists in the Silicon Valley warning about unrealized bond losses at SVB. The FDIC stepped in and seized the bank on Sunday, but on Monday contagion spread to Europe. CS was immediately identified by traders as the weakest of all European GSIB (deposit outflows in Q4 2022, series of litigation, unambitious restructuring plan) and its securities fell. The CDS curve inverted, despite CS having none of the problems US banks were facing (in particular, no significant interest rate exposure.)
On Tuesday, the annual report was finally published, the CEO mentioned deposit inflows and improved LCR to 150%. Unfortunately, an awkward interview of Credit Suisse’s largest shareholder made the crisis much worse: asked if he would provide assistance to CS, the Chairman of the Saudi National Bank clumsily said that he “ABSOLUTELY WON’T PROVIDE MORE ASSISTANCE TO CS”, when he wanted to say that he was reluctant to increase his share above 9.9% for regulatory reasons. Shares and bonds of CS fell like a stone. This led the Swiss SNB and FINMA to issue a strong statement of support, confirming that CS was compliant with its requirements, and to provide a CHF 50bn liquidity line.
On Thursday CS tried to implement the same strategy as Deutsche Bank a few years ago: buyback existing bonds. However, the transaction was viewed as underwhelming (size too small, only the most senior bonds targeted). On Friday, rumours of M&A surfaced, and a deal was finally announced late Sunday.
You can find more details in our analysis below.