Credit Suisse isn’t the Lehman moment you’re looking for
This cash drain was so deadly because too many banks (and their twin investment vehicles) were too reliant on short-term funding. Today, corporate treasurers and money managers can still quickly withdraw their cash from many places if they get finicky, but not from banks to the same degree as 14 years ago.
The flood of post-crisis reforms has given banks much greater protection against funding disruptions. Many financial and market players may not yet fully understand this, but that’s at least in part because these security measures have been dressed in the inscrutable language of deep specialists and are expressed in ratios with no obvious meaning.
Credit Suisse Group AG can tell the world that it has a liquidity coverage ratio of 191% and the vast majority of auditors will be puzzled. An analyst might further explain that this means the bank has high-quality liquid assets that are nearly double its 30-day net cash outflow forecast in a stress scenario — hats off to Simon Adamson, long-time banking specialist at CreditSights. But for many, it probably raises even more questions than it answers.
The fact that not all financially savvy people are banking specialists makes discussing liquidity dangerous if done poorly. Just before Christmas in 2018, then-Treasury Secretary Steve Mnuchin answered a question no one had asked him by suddenly tweeting that he had called every major US bank to see him and they all confirmed that they had sufficient liquidity! Cue another leg down in the stock market and a leveraged loan selloff that played out throughout December.
Ulrich Koerner, recently appointed managing director of Credit Suisse, would have done better to remember this episode when he affirmed the bank’s “strong capital and liquidity position” in the same breath as the phrase “critical moment”. in a September 30 memo to staff. and investors.
But there’s a much simpler way to look at all of this, not just for Credit Suisse, but for any lender. Liquidity coverage ratios and net stable funding ratios are sophisticated tools that are (hopefully) useful to banking regulators. Most investors can, however, reassure themselves about the differences between 2008 and today by examining a single page of the banks’ annual reports: their ordinary balance sheets and more particularly their liabilities.
Just compare the proportion of long-term debt and deposit funding now with 2007, for example: at Credit Suisse, long-term debt – the name tells you that it cannot be withdrawn quickly – was 22 % of its funding, compared to 12% % in 2007. Deposits now represent 53% of its funding compared to 25% in 2007. Deposits, of course, can be withdrawn in the most adverse scenarios; however, the guarantee programs protect ordinary consumer deposits up to 100,000 Swiss francs ($100,000) in Switzerland, which should really save the panic. Moreover, Credit Suisse’s demand deposits – those that can be recovered most easily – currently represent only 26% of its funding.
At the other end of the scale, less stable funding such as short-term borrowing from banks and markets, as well as trading commitments, now accounts for 13.5% of Credit Suisse’s funding, compared to 44% in 2007.
Now look at Lehman Brothers’ balance sheet in its 2007 annual report. It had no deposits because it was not a Federal Reserve regulated bank or a member of the Federal Deposit Insurance Corporation. His clients had cash balances in trading accounts and these disappeared quickly in 2008 – but they were initially small as a part of his balance sheet. However, Lehman had a lot of short-term borrowings from other banks and markets, as well as trade liabilities and other money it owed customers, and these made up 77% of its funding base. Long-term debt was only 18%.
Lehman Brothers was more vulnerable to cash losses than Credit Suisse was in 2007, and even less than Credit Suisse is today.
To be perfectly clear, very bad managers could still break a bank today – and that is as it should be; regulation is not intended to make private enterprise totally infallible. Poor executives might choose terrible assets, fail to understand or manage risk, or lose the trust of their staff and clients. Yet the industry – and especially the biggest banks – have been forced to change their balance sheets and funding sources in ways that make it much harder for a bank to blow up in a very quick and chaotic way.
The banks’ direct exposure to each other through loans is significantly lower than before 2008 and their funding is longer term. They must own a much higher proportion of easily salable assets, especially government bonds and central bank reserves. Both of these reduce the risk that a bank will be forced to quickly sell other types of loans or corporate bonds in a way that results in losses throughout the financial system.
If there is a next Lehman moment, it is much more likely to have its epicenter elsewhere in the financial markets.
More from Bloomberg Opinion:
• The Bank of England promotes moral hazard — Again: Marc Rubinstein
• Credit Suisse’s Hong Kong bankers deserve some love: Shuli Ren
• No, Credit Suisse is not on the brink: Paul J. Davies
This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.
Paul J. Davies is a Bloomberg Opinion columnist covering banking and finance. Previously, he was a reporter for the Wall Street Journal and the Financial Times.
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