The collapse of Silicon Valley Bank sent ripples not only through the US banking system, but also the International Financial System. When one bank becomes insolvent and collapses, fear of contagion spreads across the market. Contagion is when the ripples coming from one market affect other markets, and in this case, Credit Suisse buckled under the stress introduced into the financial system due to the collapse of SVB and was bought out by rival Swiss bank, UBS for $3 billion on Sunday, March 19.
How Did the Bank Get Here?
Well as I mentioned above, the collapse of SVB sent shocks through the banking system and banks that did not have solid financial positions (by way of their balance sheets) were at risk.
Historically, Credit Suisse has not had the same risk management and oversight of Investment Banking activities as other giants in the space such as Goldman Sachs and JP Morgan, especially since 2008.
After the financial crisis in 2008, many banks were in bad positions and new government regulations for banks changed how much capital banks must keep on hand. However, there was one bank that skirted the crisis emerging in better shape than the rest, Credit Suisse.
This false sense of “we won the financial crisis” injected even more hubris into the leadership team of Credit Suisse and prevented any real change in oversight and risk management in the bank, leading the firm to the present day.
How it Went Down
After the collapse of SVB, things moved (and still are moving) incredibly quickly. Credit Suisse, being a bank that historically takes exorbitant risk was a target by many as a bank that could not be trusted.
New information surfaced that said that the bank’s financials were not as clean and correctly reported as the bank may have led on and a run on the bank began ensued along with a plummet in the stock price. These two actions together prompted relief from the Swiss Central Bank on Wednesday, however after a brief uptick in the stock price, the fall continued Friday, leading Credit Suisse to franticly search for a buyer before market open Monday.
With a deal brokered by the Swiss Central Bank and Government, rival UBS bought Credit Suisse for $3 billion, a tiny fraction of the bank’s peak market cap of $96 billion in 2007 and ended its time as an independent bank that stood for 167 years.
For a more detailed explanation and history of the troubled Credit Suisse, see the following article from the Wall Street Journal: