Shares of Credit Suisse (CS) are on the rise after the major European lender snagged a $54 billion loan, reversing a steep decline Wednesday over concerns about the stability of the banking industry. But what does Switzerland's second-largest bank's turmoil mean for Americans? And how does Credit Suisse's sudden stumble compare to Silicon Valley Bank's collapse? Yahoo Finance Live’s Julie Hyman breaks it all down for us.
When comparing Credit Suisse and SVB, it's very much apples and oranges. Credit Suisse is much larger with assets of $575 billion, compared to SVB's $200 billion. Deposit growth of the two institutions differs as well. Silicon Valley Bank enjoyed surges in deposits from cash-flooded tech start-ups, who rapidly withdrew cash once funding dried up. Comparatively, Credit Suisse enjoyed steady deposits before a more dramatic drop-off.
The "key differentiator," Julie says, is "where their business lies." Credit Suisse is big in Wealth Management and Investment Banking, while SVB was primarily Commercial Banking with core constituents: venture capital and startups. SVB was concentrated in the tech industry, and thus not seen as a systemic risk. But Credit Suisse has a much bigger influence, because of something called counterparty risk.
As Julie explains, "there's always two sides to a trade. And counterparty risk has to do with the idea, the potential that the other party... may not fulfill its part of the deal." Since banks do business with each other and, "Credit Suisse is one of those banks that is seen as systemically important on a global basis," Julie says, its failure would be far worse for the global economy.
The fear that they may default on obligations also prompted a spike in Credit Suisse's credit default swaps. "That's effectively insurance against a default," Julie says, citing reporting "that some of the people buying these credit default swaps... were Credit Suisse's counterparties." But there's good news. The Swiss national bank's liquidity lifeline makes it much less likely that Credit Suisse would default.
Key Video Moments:
00:00:40 -- SVB vs. CS Assets
00:01:47 -- Differences of bank business
00:02:46 -- Counterparty risk, defined
00:03:34 -- Credit Suisse's default swaps
Video Transcript
[AUDIO LOGO]
JULIE HYMAN: Shares of Zurich-based Credit Suisse are recovering from its biggest one-day loss, after securing a loan from the Swiss Central Bank. Although, it's thousands of miles from the US Credit Suisse's woes could spell trouble for American markets or at least that was the concern.
Let's take a closer look at why that is. And I think it's helpful to put it in perspective versus what we saw from Silicon Valley Bank and the concerns around that, as well as Signature Bank and now some of the other regional banks, right? So to sort of compare and contrast a bit. And why these are two different stories and two different areas of concern.
First, you have to talk about the size of these various institutions, right? Credit Suisse's most recent reporting had assets of about $575 billion or so. And of course, it reports in Swiss francs. We've converted them for convenience here. Around $200 billion was the latest assets for SVB prior to its collapse.
If you look at deposit growth from these two companies, because both are deposit taking institutions, SVB had about $173 billion in its most recent report. That was a downtick. But before that, you saw a surge in deposits, which was part of the issue, right?
A huge surge in deposits from Silicon Valley, from VCs, from tech startups that then started to withdraw that money as they needed it, as they were feeling various economic duress and duress from higher interest rates. In contrast, if you look at Credit Suisse, which as we've talked about, has had issues for years. It really had steady deposits until a more dramatic drop off in its latest reporting period.
So we look at those in terms of size and then we also have to talk about them in terms of where their business lies. And this is really the key differentiator. Credit Suisse's two biggest pieces of its business are in wealth management and in investment banking. Investment banking, everything from trading to advising on mergers and acquisitions.
On the flip side, SVB, it's main business, 84% of its business was commercial banking. That means deposit taking and lending with its core constituents. We're talking about, again, venture capital and startup.
So really very different businesses for these two different banks, which brings me to why Credit Suisse is of concern to the international banking system. Silicon Valley's concerns much more concentrated in the tech industry, right? And not seen as a systemic risk, necessarily, to the US banking system, even if it could cause some economic risks when those businesses that rely on it, for instance were afraid they couldn't make payroll.
Credit Suisse's risk has to do with something called counterparty risk. That is, who's on the other side of a trade? There's always two sides to a trade, right?
And so counterparty risk has to do with the idea the potential that the other party in any kind of investment or trading transaction may not fulfill its part of the deal, could default on its contractual obligations. In other words, if I have made an agreement with Credit Suisse to sell it something, to buy something from it, if it has a liquidity issue, am I going to receive my money?
So that's where the concern come. Banks do business with each other, of course, internationally. Credit Suisse is one of those banks that is seen as systemically important on a global basis. So the idea that there was a potential that it could default on or not fulfill its obligations is the reason why we saw a spike in its so-called credit default swaps.
Remember, we've talked about the definition for that. That's effectively insurance against a default. And various reporting out there has been that some of the people buying these credit default swaps, the insurance, were Credit Suisse's counterparties. In other words, they were insuring against the potential that Credit Suisse would indeed default.
The idea that the Swiss National Bank has now come in and offered this liquidity lifeline to Credit Suisse makes it less likely, much less likely that it would default and that there was the perception of default. So those prices on those CDSes should come back down. So hopefully, I've put this in perspective, Brad, in terms of how people should be thinking about these two institutions and why there's concern about each of them.
BRAD SMITH: Absolutely, well broken down. And yes, you have put it in perspective extremely well, for those of us who are still getting up to speed, honestly, because I'm still on Austin, Texas--
JULIE HYMAN: Because they were in Austin, Texas?
BRAD SMITH: Yeah. [LAUGHS]
