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Category: Glint Special Report

Special Report: Pile on the risks

The Swiss National Bank has called Credit Suisse one of Switzerland's global systemically important banks, whose failure would cause "significant harm...

16 March 2023

Gary Mead

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The Swiss National Bank has called Credit Suisse one of Switzerland’s global systemically important banks, whose failure would cause “significant harm to the Swiss economy and financial system”. The Financial Stability Board, an international agency set up in the wake of the Great Financial Crash of 2008 designated it as one of 30 global financial institutions that are systemically important. In other words it’s seen as ‘too big to fail’.

Despite the bank giving criminals and corrupt politicians a safe haven for their assets from the 1940s until quite recently it has won many accolades, including being chosen by Euromoney as the top global private bank in a survey of 2012. Credit Suisse has been dogged for years by scandals and losses. The Guardian said of the bank in February 2022: “This is not an institution that seems to have learned lessons when it comes to risk management”.

Earlier this week, the share price of Credit Suisse plunged by 30%. Now, an intervention by the Swiss National Bank – the country’s central bank – gives Credit Suisse a “chance to resurrect itself from an almost complete collapse in confidence”. Reuters calls the SNB move, which will lend Credit Suisse up to Swiss Francs 50 billion, a “blank cheque”.

By its action the SNB may have given Credit Suisse a breathing space but one commentator says “it will basically be a zombie bank that’s state controlled”.

It has also resurrected a phrase we have not heard in a while – moral hazard. Moral hazard is the removal of people’s incentive to guard against financial risk.

The collapse of the US banks Silicon Valley Bank (SVB) and Silvergate last week posed a dilemma for US financial regulators; should shareholders in the banks be rescued, even though the FDIC (Federal Deposit Insurance Corporation) supposedly only guarantees deposits up to $250,000? The financial authorities buckled under clamouring shrieks from depositors and have said the FDIC cap has been raised – but only for now it says.

Moral hazard is back with a vengeance. The US and Swiss financial authorities may have batted away the immediate banking crisis – but they have laid the path into a new crisis, the creation of what seems like a two-tier banking system. If you can exercise sufficient political clout, perhaps you’ll be saved.

This crisis has its roots in the 2008-09 crash, which induced a bout of severe moral hazard. The policy response to the crash was ‘Quantitative Easing’ by many central banks – effectively injecting huge amounts of newly created money into their economies. Policy responses to the Covid-19 pandemic saw even more money creation and distribution, and a paralysis of economic activity. That extra free money and economic inactivity has created the inflation surges seen everywhere. The Russo-Ukraine war has exacerbated the problem. The response of central banks to inflation has been to push interest rates higher and higher, causing a collapse in bond prices, and leaving many banks (not just SVB) exposed to unrealized losses from their holding of US government bonds.

Moral hazard is once again rampant. The ‘zombie’ banks may be rescued, sold on, broken up – but what signal does this send to financial markets? That you can take on far more risk than is sensible safe in the knowledge that Big Government will always step in with funds to save you? This dangerous precedent was set in 2008; the supposed guardians of your assets – governments, central banks, private banks – have learned nothing since then.

Gold is security. Glint its key.

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