The collapse of Credit Suisse after SVB is also a lesson in realism for the ECB

Silicon Valley calls Switzerland and a shiver runs through the world stock exchanges. No one imagined that the danger could come precisely from the Helvetic republic for over a century synonymous with banking solidity and security, at least as long as it kept the secret. Now that the books are open, the flaws come out. This is what is happening at Credit Suisse. Today on the Zurich Stock Exchange it lost 30 percent, dragging down the securities of all banks (the FTSE index of Italian banks fell by 7.6). The ECB asked the databases about their exposure to Credit Suisse. The bomb went off when the number one shareholder, the Saudi National Bank (Snb), said it would not provide further liquidity as it could not raise more than 10 percent of the capital purchased last year. Credit Suisse has raised the white flag and asked the central bank for help. The stock was under pressure after the bank admitted it found “material weaknesses” in its financial reports over the past two years due to ineffective internal controls. So other managerial misdeeds like in the States? They are a few bad apples, it is said, but they spoil in an environment that has become favorable to the decomposition of the balances to which the financial system has been accustomed for a decade now. It must be admitted that with a rising cost of money, banks risk a worsening of non-performing loans and a devaluation of the fixed-rate securities with which they had filled up. This is true in the US and perhaps even more so in the EU. According to EBA data, in 2022 EU banks held government bonds worth 3,300 billion euros. The Italian ones hold BTPs for 384 billion euros plus 200 billion in other bonds. Half of the government bonds are frozen and will not be sold. Even if the value goes down it won’t blow holes in the balance sheets. This accounting device is a lifesaver, but it does not erase the risks inherent in monetary tightening. There are many calls for European supervision to act in time and for the ECB, which is meeting tomorrow to raise rates again, to soak up realism and show wise moderation.