Credit Suisse Bail-out by UBS and Government: watch your money

Sunday, the details of a government-led bailout of Credit Suisse were communicated. Also the bailouts of SVB and Signature Bank were during the weekend, last week. So, never a dull weekend anymore in the bank crisis 2.0. Banks’ only real asset is trust. And, as the Dutch idiom goes “trust leaves on horseback and returns on foot”. The banking stocks continue to drop fast. The weaker brothers like Credit Suisse might continue to face scared social media mobs and virtual bank runs. Not just in the US, but also in the UK and Europe. Therefore, I start to wonder, will I be writing these banking posts now every week?

Reduce risk of exposure to banks

That may be so. Still there are some important lessons to be learned from it already. Firstly, for startups, scaleups and ecommerce SMEs alike, it is important to spread cash over multiple banks, to reduce risk. Preferably up to the guaranteed limits of 250K euro (in the EU). Even if governments are now inclined to give a 100% guarantee on deposits, this still might be different down the road. Secondly, look at the insurance risk scores associated to your bank or payment service provider. This gives a first idea of the financial resilience of your financial service provider. And make choices based on this information. Thirdly, in case of stress signals, do a deep-dive in some more financial parameters and news. A due diligence is, of course, often a bridge too far. Take care urgently of reducing exposure when stress signals become apparent by transferring funds.

The price of cryptos is booming as investors and businesses are looking for a safe haven. But, be aware that this is very high risk. Cryptos have no intrinsic value. It is purely speculative. There are regulatory issues as well. And, as recently shown by the FTX case and arrest of Sam Bankman-Fried, there is hardly any governance and a lot can go wrong with your values as a consequence. Better stay away from this anarchistic “safe haven” and don’t gamble your business on it.

2008 revisited?

The difference with the 2008 bank crisis is that in 2008 there was a global problem with sub-prime mortgages repackaged as investment grade products. They were not. After exposed system banks failed, it took the authorities in 2008 a long time to properly respond. Nowadays, the US, EU and Swiss authorities appear to have learned their lessons. They promptly respond with government-led bailouts and quickly contain the damage. Furthermore, today, the problem is more bank-specific: how good is a specific bank managed and how well are they protected against quick interest rate hikes? In general, stress-tested banks that are monitored by financial authorities are in a far better shape than in 2008.

Therefore, it is my expectation that the current bank dramas will be quickly contained. The panic is probably the main thing we have to panic about. Authorities seems to be serious about that. However, a mild recession might still be a realistic possibility in the phase of tighter financial conditions and increased uncertainty.