Chocolate Crisis: The Americans lack credit, the Swiss lack shame
There’s a bit of a banking crisis.
But does anyone really care when Toblerone will drop the image of the Matterhorn Mountain from their packaging?
They have rules over rules for things in the mountains and quite sensibly, the “Swissness” Legislation Act of 2017 absolutely requires businesses to show how their products are sufficiently “Swiss” in order to use national symbols of Switzerland.
That’s as fair as a Swiss tennis player. As safe as a Swiss bank.
Go stateside, out California way, and you’ll see US commercial banks are being found out for their loose affiliation with rules, right now. Profits are being squeezed from deteriorating asset quality, slowing loan growth and rising deposit rates.
However, Seema Shah, chief global strategist, Principal Asset Management says that Silicon Valley Bank (SVB), Signature Bank (SBNY) and Silvergate, the three banks which have fallen in the last week, weren’t rulebreakers, just ‘somewhat unique’ compared to the broader US sector.
Here were three banks mired in deposit bases predominantly from the now-struggling technology and crypto sectors.
“The banks also held an unusually large proportion of customer deposits in fixed income securities which had significantly fallen in value as the US Fed started to push up rates. As market conditions for the banks’ clients grew more challenging, they withdrew their deposits en-masse, forcing the banks to realise their fixed income losses.
“With these bank failures threatening a loss of confidence in the financial system, on Sunday, March 12, U.S. policymakers announced that all depositors (not just those insured by the FDIC) at SVB and SBNY will have access to all their money. Hopefully, this will prop up confidence among depositors across other U.S. banks, preventing additional bank runs.
“The Fed also announced a new Bank Term Funding Program which will provide additional funding to banks that run into future liquidity problems, limiting the need for banks to sell underwater securities if deposit declines materialise.”
Seema says that if this works successfully, it too should ward off potential future deposit flights.
But back to chocolate.
That most Swiss of investment banks – ahem, Credit Suisse – has been an outlier in Swiss moderation for a good few years now, whacked by the GFC and beset by a string of scandals.
When its biggest moving part – the ahem, Saudi National Bank (9.9%) – said it couldn’t buy more shares ‘cos of rules, the Credit Suisse share price went for a -30% walk downtown in European trade.
That excitement triggered a panic rush among UK/European governments to push the Swiss into action.
Ultimately the Swiss National Bank (central bank) announced it would provide Credit Suisse with liquidity “if needed”, but not before UK/European stock indices all fell well over -3%.
Last week we learned that those yummy but shrinking Swiss exports, Toblerone chocky bars, are ditching the Matterhorn.
Under fairly new Swiss laws – apparently created to identify, isolate and perfect the Swiss corporate gene – Tobblers can no longer be considered “Of Switzerland”.
This previously trivial news follows the decision of Toblerone’s US owner the food monster Mondelez, to save some francs and move production outside of Switzerland for the first time to Slovakia. But alas, the switch comes at a significant price for the brand: under Swiss law, only milk-based products produced exclusively and entirely in Switzerland can use national symbols in their marketing.
Thus the chocolate of the classy is no longer enough “Of Switzerland” and a little bit too much “Of Slovakia”.
So in diametric opposition to the views of the Founder and CEO of Death Row Cannabis, Calvin Cordozar Broadus Jr. (Snoop Dogg), who so presciently observed in the semi-autobiographical Institutionalised: ‘You can take your boy out the hood but you can’t take the hood out the homie,‘) the Swiss are cutting the cord and disowning the milky goodness of an institution.
Toblerone, first established in the Swiss capital Bern in 1908, will be punished by moving ahead Matterhornlessly without the warmth of national confidence, without – and I’m making a bit of a stab here – its entire raison d’être – the point of why the chocky pieces come in mountain shaped triangles of yum.
Gone also: the heraldic bear, symbol of Bern, hidden cleverly amid the mountains. See it before it disappears too.
Financial stresses rapidly shifted over to Europe this week, with concerns about Credit Suisse (CS) accelerating sharply and spilling over into the broader market.
Credit Suisse is not flush with cash at the moment.
But most people, especially CS people, have been feeling bullet proof with a major shareholder like Saudi Arabia nearby.
“Overnight, a lot of people sussed out that as deep as those oil-soaked Saudi pockets are, it can’t tip any more money in because it owns 9.9% of a bank that it’s only allowed to own 10% of,” Gregor Stronach wrote quite presciently himself on Thursday.
Of course, Credit Suisse is set to borrow AUD$87.38 billion from the Swiss National Bank, so CS can float on for now.
“While the bank’s issues differ significantly from those of SVB and SNBY, CS’s problems are not new to markets or investors. The bank is in the throes of a significant restructuring plan, meant to stem major losses and revive operations, both of which have been hampered by a string of scandals over the past decade,” Shah says.
“With broad concern about the health of the global banking system and the potential for unrealised losses growing, the weakest links in the sector have come under significant pressure — with Credit Suisse sitting at the epicenter.”
The pressure on Credit Suisse, which again, has long been facing market scrutiny, quickly spiralled after the Saudi National Bank ruled out that additional funding.
In their words: “The answer is absolutely not, for many reasons outside the simplest reason, which is regulatory and statutory.”
In their meaning: Change the rules. Look what happened to your chocolate.
Of late Credit Suisse has enjoyed quite the litany of disastrous financial adventures – fraudulent loans in Mozambique to the collapse of Greensill Capital; skirting Russian sanctions to the collapse of Archegos Capital Management.
But when CS delayed the release of its most recent earnings results Tuesday (Geneva time), admitting (a little casually) that it’d found a couple of “material weaknesses” in its reporting systems.
Quite quickly the predominant image of Swiss cheese with extra holes began to emerge in the market’s collective mind… Like SVB, CS has watched deposits flowing consistently the wrong way – but unlike SVB, the CS flows been happening over months instead of hours.
In its most recent quarter, for example, CS endured a 37% outflow rate.
Traders awoke with a start to the smell of Credit Suisse/SVB fondue Wednesday morning, and the stock took a hammering
Certainly thinking more of Silicon Valley Bank than Tobelerone, the Swiss National Bank announced late Wednesday that although it’s pretty certain Credit Suisse is well-capitalised, it would ‘provide additional liquidity.’
Investors are now waiting to see what the impact of the Swiss National Bank’s pledge will be and how the ECB responds to the crisis at its monetary policy meeting.
From a broad European banking perspective, direct contagion risk from the SVB and Signature bank fallout should have been limited, the EU banks have valuation multiples ‘meaningfully less stretched’ than those of US banks, Seema says.
Not only do European banks have far less presence in the sub-sectors at the heart of the US banking worries – cryptocurrency, fintech and venture capital – the European banks also holds stronger liquidity positions and lower duration risk than their American peers.
“Market participants seem to believe that the first step toward relief would be a slashing of interest rates.
“Unfortunately, with the region facing significant inflation pressures which are even worse than in the US both the ECB and Federal Reserve find themselves in a similar conundrum — cut rates to alleviate current market angst and risk spurring inflation higher, or, alternatively, persist with aggressive rate hikes in order to avoid reinvigorating inflation, but risk accelerating contagion to the broader financial system.”
My point is obvious and of benefit to investors. Credit Saudi.