Why is everyone else nodding and I am shaking my head at the forced Credit Suisse rescue/bankruptcy/insolvency/systemic-threat/crisis? Those nodding agree that it was a prudent action by the Swiss regulator. My view is that there is nothing systemic that the market hasn’t already dealt with.
Walk down the street and ask people, in every city on earth, whether they were personally exposed to the CS crisis and they will say ‘no’. But either through their pension fund, their beneficial ownership of their nation’s Sovereign Wealth fund, their ETF investments or some other claim to a diversified investment portfolio the answer should be ‘yes’. Did they feel the risk? No. Did they shoulder some of the burden? Yes.
This is the beauty of the modern financial system, a market success and something that regulators need to take notice of. Systemic risks are very difficult to find in a world where there is layer over layer over layer of risk shifting and risk transfer so that every investor bears some small bit of another entity’s main activities.
Banking, in and of itself, is an exercise in risk transformation. Bank shareholders and some bondholders guarantee the deposits of a risk-averse depositor base in return for clipping a risk-premium leveraged several times over. In good years the bank does well. In bad years they generally do ok but some lose all their capital. This makes for great headlines and regulator nervousness but do the shareholders actually care? Bank shareholders are typically huge investment funds like Blackrock, State Street, Vanguard to name a few that hold every listed security in proportion to their market cap. These huge funds are comprised of man-in-the-street savings and investments. To put it in perspective, last Friday Credit Suisse had a market capitalisation of USD9billion or just 0.02% of the global listed equity market. Today they are gone and with it just $0.20 of every $1000 invested – but wait! In actual fact UBS, the purchaser of Credit Suisse, has gained whatever CS lost over the weekend by virtue of buying its competitor’s cheap assets. Maybe, just maybe, the loss is nothing since Blackrock, State Street, Vanguard et al own UBS too!
Credit Suisse problems were neither systemic nor systematic but it was high profile and served as a risk to regulators’ personal reputations. While I accept the system needs to inspire confidence to function effectively without daily failures, the banking model generally might need revision. In some sense, actually in every sense, the financial system has discovered a way to diversify the banking model into something that is marked-to-market and investors’ exposure diluted to something manageable. Guaranteeing the depositor base is the issue. This is easy to deal with using money market funds that themselves are marked-to-market.
I shake my head. Is anyone listening?
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