Banking Updates: Credit Suisse and SVB Financial Group Face Challenges

Credit Suisse is facing a liquidity crisis, and the Swiss National Bank is taking steps to prevent the situation from deteriorating. The authorities have decided to provide $54 billion of liquidity through a covered loan facility and standard central bank lending to support Credit Suisse's funding position. The hope is that this backstop will keep private sector liquidity providers engaged with Credit Suisse. In addition, the authorities are providing more information on Credit Suisse's capital, liquidity, and asset portfolio to reassure investors and counterparties about its finances and assets. This includes limited unrealized losses on bonds net of hedges and the quality of the large loan book funders ultimately finance.

Furthermore, Credit Suisse is taking advantage of its improved liquidity to launch buybacks of some debt securities. This move improves equity at the margin and engineers a near-term short squeeze, reversing dynamics associated with bail-in risk. However, the key vulnerability remains: the Swiss National Bank can provide $54 billion of liquidity and still be well collateralized. But given the nature of Credit Suisse's assets, it cannot escalate without taking on a lot of credit risk. This would have to be mitigated with additional equity, likely involving bail-in of Credit Suisse's debt. So there is a risk of returning to unstable dynamics.

SVB Financial Group has filed for Chapter 11 bankruptcy, but its securities and funds continue to operate as normal. The Chapter 11 process will allow SVB Financial Group to evaluate strategic alternatives for its businesses and assets, especially SVB Capital and SVB Securities. The hope is to preserve the value of the company and sell off parts of the capital structure for pennies on the dollar.