Credit Suisse (CS) is no stranger to controversy and embarrassment. A big player (and loser) during the Great Recession, CS has seen the toxicity of poorly managed derivatives first hand. Then it’s suffered later scandals, such as a fraudulent loan of $850 to Mozambique, a massive loss from trusting and funding Archegos, and being involved in the Libor fixing scandal. So when it comes to track records, CS doesn’t have much to crow about.
That doesn’t mean that CS is going insolvent anytime soon, however. For the bank to fail, it will need to have such a dramatic capital shortfall and an inability to raise capital that effectively locks it into inaction, which in turn would force a bankruptcy and liquidation—the kind of death spiral Lehman Brothers suffered.
Following the changes to bank capitalization rules in Basel III, however, these death spirals are significantly less likely to happen because of higher capital requirements and stricter risk assessment protocols. One important difference is that CS’s capital backstop for its liabilities comes from deposits and not from repurchase agreements, which are much riskier and less liquid. There is also a bail-in bond structure at the center of CS’s balance sheet, where debt can be converted to equity to avoid direct and immediate losses. The risk here is more to common shareholders of CS than to the debtors themselves, who will have a higher claim than common shareholders and immediate liquidity if the bonds are triggered.
This doesn’t mean everything is wonderful at CS. The firm’s credit default swaps (CDSs) have risen in cost by 5x since the start of the year, making it more expensive for CS to ensure their debt than any other bank by a huge margin.
Furthermore, the current estimates suggest that CS will face a capital shortfall of around 4-6 billion Swiss francs, which the firm will need to cover very soon. And as horrifying as that sounds, CS has over 760 billion dollars in assets on its balance sheet and $167 billion in cash. If we strip away liabilities values of 713.7 billion, the firm still has a positive value balance sheet. So, the bank isn’t going to collapse tomorrow.
The real problem is that, at its current trajectory, it will eventually fail. With a $3.7 billion net loss in the last 12 months, CS has reversed from the profitability it saw in 2018, 2019, and 2020, and losses are accelerating. The good news is that much of this ($1.7 billion) is in goodwill impairment, itself a nebulous and abstract concept that for the most part does not reflect actual changes in net income. Operating income of $1.5 billion over the last 12 months is a massive decline from the near $5 billion average from 2018-2020, but it is still solidly positive.
With arguments pro and con CS easily available, the real answer to what will happen to this bank and its liabilities rests on the balance sheet itself. Its debts aren’t the only concern, but what interest those debts are meant to pay, the firm’s counterparties, and the timing of asset/capital flows through the bank. Any of these on their own could be risks beyond the overhang all banks are currently suffering—and while the internet might be right that there is one or a few smoking guns to suggest CS’s days are numbered, due diligence is required to prove or disprove that hypothesis.