The US banking crisis has penetrated the heart of the Swiss finance hub in just a few days. Credit Suisse’s fate now hangs by a thread. Only a miracle can prevent the worst from happening on Zurich’s Paradeplatz, writes Swiss finance professor Teodoro Cocca exclusively for finews.asia.

Things are getting serious. Until now, the global banking sector had remained surprisingly quiet. But now the events surrounding the collapse of Silicon Valley Bank (SVB) have prompted a renewed crisis.

Banking is a very sensitive business. Numbers and facts play an important role most of the time. Emotions rarely come into it. But when they become a driving force, their impact is akin to that of a tsunami.

If clients become start to feel mistrustful or uncertain, that can exacerbate a bank’s problems. Things can go quickly. SVB again shows that – again. Bank clients around the world are asking the same question. What kind of write-downs do other banks need to make given the increase in interest rates?

«In practice, banks collapse much earlier»

Those that thought that bank markets could be segregated into regions do not understand the condition that markets are in and how digitally networked financial industry clients are. What happens in the US is also relevant domestically given that the wildest rumors about the global banking system have been coursing on social media for days.

There are about 18,000 kilometers between SVB’s head office in Santa Monica and Credit Suisse’s home on Paradeplatz. You can count any number of differences between the two banks but that doesn’t really matter when uncertainty grips the markets.

It is naïve to think that banks go under simply because they don’t have any liquidity or capital anymore. In practice, they collapse much earlier, usually at the point when doubts arise as to the safety of the deposits they are holding.

«Only a miracle can prevent the worst from happening on Zurich’s Paradeplatz»

The fate of the bank is sealed if those doubts start to snowball. That is what happened to SVB and what is now going on with Switzerland’s second-largest bank. Only a miracle can prevent the worst from happening on Zurich’s Paradeplatz.

The immediate trigger of Credit Suisse’s crisis is a statement by a major shareholder, also a bank, stating it doesn’t intend to inject more capital into it should that eventuality become necessary. Saying something like that in the current environment, and against the background of the situation it itself faces, doesn’t show a great deal of sensitivity to current market events. In fact, it is a very good way to really get a bank run going.

It is also clear that implementing the bank’s restructuring plan from last October was not an impossible task. However, it did require one thing. No more negative events. The bank also had to hope for supportive markets.

That didn’t happen, but no one can say that the current situation is a surprising one and that the current wave of speculation engulfing Credit Suisse comes completely out of nowhere.

«The bank run that Credit Suisse experienced last autumn was not given its due weight at the time»

Instead, it is becoming clear, and far more surprising, that regulators were too positive about the bank’s situation, as Credit Suisse’s leadership itself always was. The bank is at a knife’s edge and they seemed to consciously accept that the longer the situation lasted, the higher the risk that something even worse could happen.

Instead of looking for a solution that might sacrifice the bank’s independence or at least save parts of its business, they chose to let the bank take the risky path of turning things around on their own.

The bank run that Credit Suisse experienced last autumn was not given its due weight at the time. It should have been clear to anyone that such a situation could reoccur at any time. The fundamental information about the bank was not about to change, particularly in such a short time. And they should have been aware that Credit Suisse was not in a position to survive a similar bank run for a second time.

«It is incomprehensible that these alarm signals were overheard for such a long time»

But they still decided to take the risk given the Swiss Financial Supervisory Authority (Finma) permitted it. They have supervisory instruments to require the bank to take a different path. And the time for that is now. A government-orchestrated rescue for the bank’s core business seems likely in order to bring the most system-relevant parts of the business to quieter waters.

It is only the capital markets that are speaking relatively clearly right now, should anyone take the time to really listen. The bank’s share price and credit default swaps (CDS) spreads could not be developing any more starkly than now. It is incomprehensible that these alarm signals were overheard for such a long time.

It also does not help to link Credit Suisse’s current turnaround with the effort Deutsche Bank made. The German bank’s CDS spreads were never at the same level as Credit Suisse’s have been in recent weeks and the client outflows were never as grave as they have been at the Swiss bank.

«Any uncertainty out there about a bank’s deposits will lead to guilt by association»

Will the situation at Credit Suisse prompt a new financial crisis? In the immediate term, the script will be the same as it was during the 2008 financial crisis. Uncertainty will lead to wild price jumps and turbulence affecting the entire banking sector. Any uncertainty out there about a bank’s deposits will lead to guilt by association.

Regulators, central banks and governments will attempt to calm the situation. The wheat will be separated from the chaff and then we will know how well the new capital and liquidity rules work.

A great deal has happened since the last financial crisis when it comes to bank regulation. Now we will see through the thicket of detail surrounding the new rules whether anything acutely relevant has been dropped by the wayside. The real stress is just getting started.

Teodoro D. Cocca has been Professor of Asset and Wealth Management at Johannes Kepler University Linz since 2006. Before that, he worked for several years at Citibank in both investment and private banking, conducted research at the Stern School of Business in New York, and taught at the Swiss Banking Institute in Zurich. In addition, the Swiss with Italian roots is an associate professor of private banking at the Swiss Finance Institute (SFI) in Zurich and acts as a consultant for financial companies and public authorities in Switzerland and abroad.