Credit Suisse stock dropped more than 25% after the Saudi National Bank (SNB) said it would not buy more shares of the troubled Swiss bank. SNB Chairman Ammar Al Kudairy told Reuters, “We cannot because we would go above 10%. It’s a regulatory issue." The SNB holds a 9.88% stake in Credit Suisse. The SNB shored up Credit Suisse following several scandals and insolvency fears in October. 

Credit Suisse's share price has steadily declined for years and fallen to a record low. Trading was halted late morning as the shares fell more than -30% but rebounded to a -20% loss. The Credit Suisse fallout is battering European banks. The Swiss Credit Suisse competitor, UBS, fell -6.8%, and two French banks fell 11% today. German Deutsche Bank dropped 8.4%, and Spanish bank Banco de Sabadell was down 9%. The SX7P (index of European banking stocks) is down -7% on the day. The index has lost over 120 billion Euros ($127.25 billion) or 14% since March 8 . 

Regulators and financial executives around the globe have tried controlling contagion fears after SVB collapsed last week. Germany's monetary authority, BaFin, does not believe that contagion is possible in Germany but is concerned about some smaller German banks without excess capital. The Swiss National Bank declined to comment on the Credit Suisse situation.

In October 2022, Credit Suisse's stock price was highly volatile. Investors began betting against Credit Suisse's ability to pay their debt through credit default swaps. The fear was that Credit Suisse would experience a significant liquidity and solvency crisis within a few years. At this point, the SNB stepped in and bought 9.88% of the Credit Suisse shares. 

Bloomberg reported today that Credit Suisse credit default swaps had reached a record level and more than 18 times the rate for UBS. Credit Suisse’s projected five-year earnings are -135.26%. The price of Credit Suisse credit swaps was 835.9 basis points at the close of business Tuesday and 1,200 basis points today. Credit default swaps (CDS) rising above 1,000 basis points is rare. Greek credit swaps were above 1,000 basis points in 2015 during its banking crisis. Also, the CDS curve is inverted, meaning it is significantly more expensive if a failure happens sooner rather than later. In response, traders have taken a $15.7 billion position betting against European banks.

The Federal Reserve sent $6.27 billion to the Swiss National Bank through a Swap Line and $211,500,000 to the European Central Bank in October. Last week, the Fed sent more than double that amount, $469,700,000, to the ECB. The Fed has not announced any swaps with the Swiss national bank yet, but the Swiss National Bank is one of five central banks with open swap line credit from the Fed. 

The Treasury stated that the situation is being monitored closely to ensure appropriate steps are taken, which probably translates into a large dollar swap or a collateralized loan of some type is coming. Don't be surprised if the Fed makes a longer-term swap than the traditional seven days like it did during the pandemic. During the pandemic, the swap lines were open for months. 

The most likely scenario will be an extension of the “loan” program the Federal Reserve created for U.S. banks in response to the SVB collapse. The Fed is doing quantitative easing and calling it a loan program. Banks can collateralize one-year liquidity loans with debt securities like Treasuries and mortgage-backed securities. The securities will be sold at par, so future interest rate hikes will not hinder the Fed balance sheet. The Fed will probably require the Swiss National Bank to swap European Bonds or U.S. Treasuries in exchange for infusing a massive infusion of liquidity into the Swiss banking system.

The future is always uncertain, but sometimes it is more uncertain than usual. For many people, the future has never felt more insecure. Waves of people are removing money from small and mid-sized regional banks and moving their money into “too big to fail” banks. Moody's placed six more U.S. banks under review following the collapse of SVB and Signature Bank. 

The international banking system is experiencing a tragic Catch-22. High amounts of cash in the system lead to higher inflation and interest rates. Low amounts of cash create liquidity problems. The international banking system needs help with high inflation, high-interest rates, and a liquidity shortage. The options are to flood the system with cash or fight inflation with higher interest rates. The influx of cash would solve the liquidity issue but restart the inflation cycle. Continuing to fight inflation with higher interest rates will exacerbate the liquidity problem. Conventional means make solving both problems simultaneously almost impossible. The global economy must pick its poison because economic pain is coming. Eventually, the excess cash in the system must be removed, and more things will be broken. The unknown is whether it will happen immediately or in a longer time frame. It makes sense to prepare for both scenarios.

Gold and silver may be the life rafts on this sinking ship. Precious metals have been the trusted, safe haven assets for thousands of years. Our current economy may feel very sophisticated and complicated. There are investment instruments to bet against a bank's solvency. Complex derivatives can make the most sophisticated investor scratch their heads. We can trade million-dollar contracts on a cell phone, but economic chaos is not new. The world ship has sunk many times, and people return to precious metals every time. People continually return to precious metals because it has continuously worked and preserved the fortunes of countless kings and paupers. Do you have a better plan than what has worked for thousands of years?

Want to get some money out of the banking system and put it into a financial life raft? 

Call the U.S. Gold Bureau today.

(800)775-3504