Freeing Up Restricted Capital

Credit Suisse over the weekend was acquired by Swiss rival UBS for $2 billion. Just a month before that Credit Suisse was worth north of $8 billion and back before the Great Financial Crisis it was worth over $90 billion and worth more than Apple (before the release of the iPhone).

What happened to Credit Suisse at a high level wasn’t much different than what happened to Silicon Valley Bank, they were run. But the reason they were run has been slowly revealing itself for a long time.

Credit Suisse has been the front of many scandals, so much so that they had full time settlement teams to hide these scandals from the public and bank depositors.

In their annual report released last Tuesday they stated that they had identified material weakness in its reporting procedures for fiscal year 2022 and fiscal year 2021. The material weakness refers to the bank’s failure to maintain an effective assessment process to identify material misstatement risks in its financial statements.

Spooking investors and depositors who were already spooked by the banks long standing issues, and the Saudi’s couldn’t bail them out as they did in 2008. It was highly important for the Swiss government to come to a resolution before the Asian markets opened, either an acquisition by UBS or the Central Bank takes over Credit Suisse.

To the individual this doesn’t mean much, unless you hold Credit Suisse shares or held deposits at the bank. But to the world this matters a great deal. Bank crises restrict the flow of capital. Credit Suisse being a globally systemically important bank restricts the flow of capital.

Which is why we’ve seen the Federal Reserve, and other central banks around the global increase liquidity to offset capital restrictions.

Essentially this isn’t printed money, this is the discount window. Banks can borrow at the Federal Reserve’s discount rate for a year to stem off any liquidity concerns that they run into over the next year. Currently the Fed allows $300 billion in discount window borrowing by banks.

But there is some inherent arbitrage in this. Banks can borrow at 4.5-4.75% and do what banks do and lend long, capturing the spread on the rates. But that’s what the Fed expects, that’s how liquidity gets injected into the markets.

We have a big week this week. Understanding the Federal Reserve’s thought process and proceedings in this environment will be key in the markets future forecasting. It goes without saying this opens a lot of doors for uncertainty because despite a banking crisis, we still have aggressively high (but falling) inflation and an extremely tight labor market.

Follow me in Fjell Capital Weekly as I dive deeper into the Federal Reserve’s interest rate decision and anticipated path also be sure to check out this week’s episode of the Laminate Money Podcast.