The Breakdown - Is Credit Suisse the Next Banking Domino?

Episode Date: March 16, 2023

Following the failure of Silicon Valley Bank and Signature, markets are holding their breath for more trouble in the banking sector. Wednesday morning, comments from one of the biggest investors in Credit Suisse sent that company’s stock tumbling. Numerous European banking stocks followed Credit Suisse lower, leading some to wonder if the U.S. banking crisis was moving overseas.   Enjoying this content?   SUBSCRIBE to the Podcast Apple:  https://podcasts.apple.com/podcast/id1438693620?at=1000lSDb Spotify: https://open.spotify.com/show/538vuul1PuorUDwgkC8JWF?si=ddSvD-HST2e_E7wgxcjtfQ Google: https://podcasts.google.com/feed/aHR0cHM6Ly9ubHdjcnlwdG8ubGlic3luLmNvbS9yc3M=   Join the discussion: https://discord.gg/VrKRrfKCz8   Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big-picture power shifts remaking our world. The breakdown is produced and distributed by CoinDest. What's going on, guys? It is Wednesday, March 15th, and today we are discussing whether Credit Suisse is the next banking domino. A quick note before we dive in, there are two ways to listen to The Breakdown. You can hear us on the Coin Desk Podcast Network, which comes out every afternoon, and is featured alongside other great CoinDesk.

shows, or you can listen on the breakdown only feed, which comes out a few hours later in the evening. Wherever you're listening, if you are enjoying the show, I would so appreciate it if you would leave a rating or a review. It makes a huge difference. All right, friends, today we are talking about the same thing that everyone in traditional markets is talking about, which is Credit Suisse. Bloomberg's headline blair's Credit Suisse in fight to win back confidence as shares plunge. And that headline has recently been updated to the even scarier Credit Suisse ignites global market route as banking fears return. So what's going on? Is Credit Suisse the next domino? Is it a big nothing burger? Is it something totally different? But it doesn't matter that it's totally

different because all people here is bank failure and they get scared. Let's dive in. So Credit Suisse has been looking shaky for a while. It's in the midst of a larger restructuring process by which its investment banking division will be spun out and the bank will focus just on its wealth management division. This is actually its second big strategic pivot in the last two years, and obviously in the world of banking, that sort of bobbing and weaving isn't necessarily something investors get too excited about, to say nothing, of course, of depositors. Now, right now, the specter of Silicon Valley Bank is hanging not only over Credit Suisse, but the whole banking sector. This is despite the fact that Credit Suisse's leadership says there's no comparison, and that the bank trying to get

back to profitability after changing its strategy has nothing to do with the extreme liquidity issues of smaller U.S. banks. However, this morning, markets were further roiled when the chairman of the Saudi National Bank, which is Credit Suisse's biggest shareholder, said that they would not be investing any more money into the beleaguered bank. The chairman of the Saudi National Bank said that the biggest reason is just regulatory and statutory reasons that prevent them from boosting their share beyond the just under 10% they on now. Now, as prosaic as that might be, it obviously still wasn't good news. CS's shares were down as much as 29% hitting a new all-time low. Their one-year default swaps are also in a distress zone, currently sitting around 18x the one-year CDS for UBS

and 9x for Deutsche Bank. Now, all in all, there are two big and quite different interpretations of what's going on. Investor in China Permabere, Kyle Bass, writes, the recent collapse of SVB, Signature Bank, and Silvergate Bank was a warm-up of larger things to come outside of U.S. borders. Credit Suisse's five-year insurance against default has gone parabolic this morning. Given their capital structure, they now have three weeks or less to be sold. Greg Foss says if you thought SVB caused some unease in the credit markets, just wait until Credit Suisse collapse.

The derivative exposure and counterparty risk concerns will be Lehman Brothers-like. Regulators need to pay a merger partner since true equity value is negative. Fiat Ponzi 101. Now, a more sober but still concern take comes from Andreas Steno-Larsin, who writes, Credit Suisse has been able to withstand heavy deposit flight through the past 12 months with decent liquidity ratios intact, but the bleeding has got to stop for Credit Suisse to survive. Hikes are not positive for banks now. Then again, on the other side of this discussion, there is Tony Greer who writes,

For what it's worth, Credit Suisse has been blowing up my entire career. I'm amazed we're still talking about it. In any case, once again, their communications are not helping things. Zero Hedge tweets, Credit Suisse CEO, we are a strong bank in overshoot already. regulatory requirements. Credit Suisse CEO, our liquidity base is strong. Hate to see what a weak liquidity base would look like. Still, my favorite take comes from Doug Bonaparth, who says Credit Suisse, downgraded to Credit Suss. So I think that what's going on at Credit Suisse is

quite obviously very different than what's happening at places like Silicon Valley Bank and other U.S. banks who are underwater because of unrealized losses and this shift in the global interest rate regime. However, I don't think that in this environment that particularly matters. I think that people are seeing bank trouble and are thinking about the implications of another bank failing, even if it fails for entirely unrelated reasons. There's certainly some evidence that this nervousness is extending across the banking sector, and that Credit Suisse is giving that a particularly European flavor. A number of European banks were dragged down today by the Credit Suisse news, including Society General, B&B Paribus, and others which are down more than 10%.

All told among European banks today, more than $60 billion in combined market value was extinguished in today's trading. Oliver Sharping, a portfolio manager at Bantleon says there's panic and traders are scrambling for safety. A senior investment manager at Pickedet asset management adds, investors are increasingly worried about banks' balance sheets and the effects of the rapid rise of interest rate on the cost of funding. So clearly this is a situation we need to keep our eye on. However, it's not just Credit Suisse that are dealing with the fallout from last week. On Monday, ratings agency Moody's investment services downgraded the entire U.S. banking sector from stable to negative. The firm, one of the big three ratings providers, said in a report,

we have changed our outlook from stable to negative on the U.S. banking system to reflect the rapid deterioration in the operating environment following deposit runs at Silicon Valley Bank, Silvergate Bank, and Signature Bank. The announcement comes after an earlier warning that Moody's was either downgrading or placing on review for downgrade seven individual institutions. This adjustment in ratings could impact credit ratings for bonds issued by banks, as well as borrowing costs across the sector. Despite the establishment of an emergency liquidity facility from the Federal Reserve, Moody's still had concerns about the stability of some banks, stating, quote, banks with substantial unrealized securities losses and with non-retail and uninsured U.S. depositors may still be more sensitive to depositor competition or ultimate flight, with adverse effects on funding, liquidity, earnings, and capital. End quote. Now, this concern about the continued withdrawal of deposits appears to have some.

basis in reality. On Tuesday, the Financial Times reported that J.P. Morgan Chase, Citigroup and other large financial institutions have been inundated with applications to open accounts from new customers. The megabanks have taken extra steps to speed up the normal onboarding process, according to anonymous sources. One person familiar with the situation said J.P. Morgan have shortened the waiting time to open a new account and expedited the availability of funds for new corporate clients to ensure that firms will be able to pay staff by the end of next week. City's private bank, which deals with wealth management clients, is reportedly trying to open accounts within a day of application, rather than the usual two weeks.

Sources said the bank is also opening accounts and initiating money transfers while the new client is still undergoing compliance checks. Bank of America has seen more than $15 billion in new deposits in just the last few days. Now, in this context, these systematically important banks are working pretty hard to not be viewed as taking advantage of the situation. J.P. Morgan has apparently told bankers that they should not make active attempts to poach clients from smaller rivals. One private banker told the Financial Times, clients are like, I've learned my lesson. I'm not just diversifying my portfolio. I want to diversify my bank. Now, bringing it back to one of the banks that quote unquote failed, let's talk about signature. Obviously, if you heard or saw any of my coverage over the

last few days, I thought it was extremely suspicious that somehow signature was the only impaired bank to be shut down before markets even started trading. Could it be, I wondered, that they were connected with crypto and one of the last big banks to be so. Those suspicions, were validated when signature board member and financial regulation architect Barney Frank came out and said that he also thought that signature was targeted to send a message to the crypto industry. Apparently, Barney's comments were enough to warrant a follow-up from the New York Department of Financial Services because a spokesperson for the NYDFS said on Tuesday, quote, the bank failed to provide reliable and consistent data, creating a significant crisis of confidence

in the bank's leadership. The decision to take possession of the bank and hand it over to the FDIC was based on the current status of the bank and its ability to do business in a safe and sound manner on Monday. They added that the decision, quote, had nothing to do with crypto and that the agency, quote, has been facilitating well-regulated crypto activities for several years and is a national model for regulating the space. NYDFS superintendent Adrian Harris on Monday said, quote, Signature Bank has a broad depositor base, so this idea that it is a crypto bank is not an accurate one. This is not about a particular sector in the cases of Signature Bank, but we moved quickly to make sure depositors were protected. According to Bloomberg reporting, Signature saw

pretty significant withdrawals on Friday that totaled around 20% of the bank's depositor base. In her statements, Harris noted that, quote, because of the amount of outflows we saw on Friday, we knew we were going to have to take action over the weekend so that they could open on Monday. Still making further comments on Tuesday, Barney Frank said that although he was not directly involved with regulators or monitoring the bank's financial position, he said that, quote, by Sunday morning, the executives of the bank believed they had satisfied the need for the data and had secured the capital from the discount window and elsewhere. Frank stuck firmly to his belief that the bank would have been able to reopen on Monday and that the seizure was related to Signature's

willingness to engage with crypto firms. Now adding one more wrinkle to the story, additional reporting from Bloomberg on Tuesday had anonymous sources saying Signature was under investigation by the Justice Department prior to its seizure. They said investigators in Washington and Manhattan were examining whether the bank had taken sufficient steps to detect potential money laundering by clients. The SEC was also suggested to be looking into activities at the bank. So I don't know, man, there's a lot going on here, and I remain pretty firmly in the camp of still not convinced. Join CoinDesk's Consensus 2023, the most important conversation in crypto and Web3, happening April 26 through 28th in Austin, Texas. Consensus is the industry's only event

bringing together all sides of crypto, Web3, and the Metaverse. Emmerse yourself in all that blockchain technology has to offer creators, builders, founders, founders, brand leaders, entrepreneurs, and more. Use code breakdown to get 15% off your paths. Visit consensus.coindesk.com or check the link in the show notes. Speaking of investigations, a couple little bits of news to catch up on that we hadn't got to yet giving the banking sectors hemorrhaging all around us. The Wall Street Journal has reported that the Justice Department is looking into last

year's collapse of TerraUSD. According to anonymous sources, the FBI in Southern District of New York prosecutors have questioned former employees at Terraform Labs and have sought to interview others. In February, the SEC filed a lawsuit against Terraform Labs and their CEO, Doe Kwan, accusing the firm of misleading investors about the risks of TerraUSD. The DOJ investigation is covering similar accusations of fraud, according to these WSJ sources. Now, sources speaking with Bloomberg said that the investigation doesn't stop at Doe Kwan and Terraform Labs. Those sources added that U.S. prosecutors are looking into group chats between prominent trading firms including Jump Trading Group, Jane Street Group, and Alameda research about a potential bailout of TerraUSD as the Stablecoin was on the precipice of collapse.

The Bloomberg source said the messages were being looked over to see if market manipulation occurred. Ultimately, the bailout did not occur, and TerraUSD disintegrated into worthlessness shortly after. No charges have been filed against any of the parties, and there is no indication at this stage that charges will be pursued. Mike Dutas from Six-Man Ventures says they're coming from. for your group chats, Anon. Staying on the theme of U.S. regulators, the U.S. Treasury is close to publishing a risk assessment report which will analyze the use of defy in illicit finance. Speaking at a banking event in Sydney, Australia on Monday, Assistant Secretary for Terrorist

Financing and Financial Crimes, Elizabeth Rosenberg said, elicit actors are constantly looking for effective ways to hide criminal activity and the laundering of their proceeds. This is a threat to defy services or other elements of the virtual asset ecosystem. She said her team is, quote, actively working on the report, which will be publicly released. soon. Rosenberg went on, stating that, quote, the explosion and pace of developments in the virtual asset space are frankly astounding. This can often mean the industry treats regulations and financial crimes compliance as an afterthought. While government should be wary of stifling

innovative spirit, we cannot forsake the obligation to promote financial integrity and protect people and financial systems from fraudsters and criminals. Now, it seems like the main concern was the use of defy by North Korean hacker groups to conduct ransomware attacks and steal hundreds of millions of dollars worth of digital assets, which Rosenberg claimed had been used to fund a illegal nuclear and ballistic missile programs. Rosenberg said, I am intrigued by the potential legitimate use cases for decentralized finance, yet I know that illicit actors are constantly looking for effective ways to hide criminal activity and the laundering of their proceeds.

This is a threat to defy. Rosenberg also suggested that defy could assist in providing financial services to underbanked populations. These comments were a good reminder that before FTX, we were still in the world where most of the regulatory discourse, even though it was skeptical of crypto, was largely focused on this sort of side of things. Investor protections, preventing criminal use. And for those who are longtime listeners, you'll have heard me say before that the big risk was always that crypto moved in regulators' opinions from those types of concerns to the systemic risk type of concern, which clearly we have moved into that space now. Anyway, the crypto industry is definitely

getting the memo that the U.S. government is pretty actively hostile to them. The frustration was palpable on Tuesday afternoon as crypto industry figures erred their grievances with regulators at an annual futures industry association conference in Florida. Former CFTC Commissioner and now head of policy at A16Z, Brian Quintens, did not hold back. He said the SEC is completely out of control. They're going rogue. Indeed, Quintin said that overzealous regulators are driving the industry offshore. Quote, the United States has to make a decision about whether or not it will embrace and support innovators in this country. There are jurisdictions that are mindful about this.

This is not what we are seeing in the United States, and the clock is ticking. Now, adding some evidence to this, major crypto-friendly banks Singham in Switzerland and Bank Frank and Liechtenstein told CoinDesk that they have seen an increase in request to open accounts in the past few days from various jurisdictions, including the U.S. Swiss Bank Siba said that they had already started onboarding new crypto clients. Their managing director, Yves Longchamp, said that they had seen increased interest, quote, across all segments in the space, from VCs to foundations to trading firms and treasuries. In his view, quote, it's no longer reliable to rely on one banking provider in one jurisdiction

anymore, particularly when recent messaging from the regulating bodies has been less than encouraging. For retail customers, Gibraltar Zappo Bank said that it had seen an increase in demand over the past few days as well, and is currently close to adding payment services in British pounds, as well as USDC options. Their CEO, Seamus Raca, said that the push for overseas banking is a, quote, missed opportunity for the U.S. economy, given that it has the best chance of regulating the industry and helping it mature. Other banks in Puerto Rico, Bermuda, the Bahamas, and Dominica also reported an uptick in new customers. I think the lesson here is that it's not, just theoretical anymore that crypto industry participants are looking outside U.S. borders for more of

their financial services. There may be some cynics in the U.S. government that think that's a good thing, but I think for those of us here, we clearly feel it's not. Anyways, guys, the situation in crypto banking and in banking in general remains extremely dynamic. I will keep bringing you the news as it breaks, but for now, I appreciate you listening as always, and until tomorrow, be safe and take care of each other. Peace.