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The fall of the titans

After twenty years of loose monetary policy, recent turmoil in the banking sector begs the question: idiosyncratic story or systemic issue? – leaving central banks stuck between the fight to tame inflation and the need to preserve financial stability

The Silicon Valley Bank (SVB) (NASDAQ:SIVB) has always been somewhat of an outlier. Whether or not the whole idea was a disaster waiting to hap- pen is a different matter. To the trained eye, alas, it was.

SVB was founded in March 1983 by a group of entrepreneurs, including Bill Bigger staff, Bob Medearis, Roger Smith, Reed Taussig and Ken Wilcox. The five spotted a business opportunity for a specialist bank that would serve the technology industry, which was starting to emerge as a major economic force in Sili- con Valley.

Back then, mainstream banks were loath to lend to technology startups, which they viewed as too risky and unproven. Early on, SVB raised $3 mil- lion in risk capital from Institutional Venture Capital, Lucas Venture Group and Draper Associates.

Soon thereafter, it began offering banking services to small and mid-sized companies within the Silicon Valley ecosystem. In the early days, SVB focused on providing corporate loans, bill finance, bank guarantees, cash management, as well as working capital solutions that were tailored to the needs of scale up firms. Initially, the bank, a startup itself, operated out of a small office in Santa Clara, California and had a staff of just five employees. The bank’s first loan was to a company called Hybritech, a biotech firm that was lat- er acquired by Eli Lilly & Co. (NYSE:LLY).

As the technology industry grew in the 1990s, so did SVB’s business. The bank became known for its expertise in the sector and its inclination to take up riskier loans. SVB also began to expand its services to include investment banking, venture capital and asset management.

Before its spectacular bankruptcy of March 2023, right on its 40th anniversary, SVB had opened offices around the world, including in the key technology hubs of London, Hong Kong, and Tel Aviv; employed over 4,000 staff; and served more than 30,000 clients in the technology and biotech sectors.

SVB had a distinctive business model that set it apart from other banks. First, it was focused on the technology and biotech industries: SVB’s operations were built around serving the unique needs of high- growth companies.

Additionally, it had an idiosyncratic risk appetite: SVB was willing to take on riskier loans than its competitors. This is because the bank under- stood that innovative companies often require significant upfront investment, success is not guaranteed, and was willing to lend to startups that were just getting off the ground.

Finally, SVB’s activities extended beyond financial services to include strategic consulting, business advice, networking opportunities, and other resources to help technology companies grow.

SVB’s strategy has not lacked success. Over time, SVB has forged some impressive business relation- ships. It has been a lender of choice to Tesla (NAS- DAQ:TSLA), the electric vehicle maker, since 2009. In 2013, the bank provided Tesla with a $150 million cred- it facility to support the company’s growth. Tesla has since become one of the world’s most valuable companies.

Additionally, SVB has provided banking services to Apple (NASDAQ:AAPL) for many years. In 2018, SVB was part of the underwriting syndicate that placed Apple’s $7 billion issue of debt securities to fund its massive stock buyback. SVB also provided banking services to Square (NYSE:SQ), a mobile payments company founded by Jack Dorsey, the co-founder of Twitter; then helped Square go public in 2015; and continued to support the company, as it has expanded its oferings.

More recently, SVB provided financial services to Zoom Video Communications (NASDAQ:ZM), a video conferencing company that experienced explosive growth during the Covid-19 pandemic. SVB helped Zoom with its initial public offering (IPO) in April 2019 and has continued to provide banking services to the company, facilitating its upward trajectory.

While SVB had built a reputation as a leading provider of financial services to the technology industry, there have been a few notable blunders committed by the bank. In 2018, SVB was fined $450,000 by the New York State Department of Financial Services (NYDFS) for anti-money laundering (AML) violations. The NYDFS found that the bank failed to detect and report suspicious transactions, did not properly monitor high- risk accounts, and did not maintain adequate AML controls. The bank also failed to conduct proper due diligence on a customer who was involved in a $1billion money laundering scheme. SVB was also ordered to undertake a review of its AML policies and procedures, and to take corrective action where necessary. In 2020, it was reported that SVB had mistakenly made duplicate loan payments to some of its Paycheck Protection Program (PPP) borrowers. The bank attributed the error to a technical glitch and quickly rectified the mistake, but the incident caused confusion and inconvenience for some of its customers. Additionally, in 2021, SVB was criticized for its involvement in the collapse of the sup- ply chain finance firm, Greensill Capital. SVB was one of the banks that lent money to Greensill, which ultimately filed for insolvency due to concerns over its business model and accounting practices. SVB has stat- ed that its exposure to Greensill was “wellcollateralized and low-risk”, and that it did not expect the insolvency of Greensill to have a significant impact on its financial position. SVB was not accused of any wrongdoing in the case, but its involvement in the affair raised questions about the bank’s due diligence and risk management practices. More worryingly, in 2019, the bank reported over $102 million in losses on its loan portfolio, driven in part by exposure to troubled companies in the tech- nology industry.
On the business side, SVB’s distinctive features also carried peculiar risks. Above all, concentration risk: SVB’s business model, being heavily concentrated in the technology industry, meant that the bank’s success was correlated to the general performance of one industri- al sector. Were the technology industry to experience a downturn, things for SVB could turn painful. Concentration risk, in turn, exacerbated interest rate risk and liquidity risk. Like all banks, SVB was exposed to inter- est rate risk. Changes in interest rates have a direct im- pact on banks’ net interest income and their ability to attract and retain deposits. Managing interest rate risk effectively is a critical component of banks’ financial management. Furthermore, banks’ ability to meet their funding needs in a timely and cost-effective manner is critical to their financial management. Banks must manage their liquidity effectively to ensure they can meet the demands of their customers and comply with regulatory requirements.
The core business of banking is “maturity transformation”. Credit institutions raise short-term funds, such as customer deposits, and employ them to make medium- or long-term loans. By transforming maturi- ties, banks earn their profit margin. The competent execution of this activity is crucial to the functioning of the banking system and its ability to provide long-term financing to the economy. During the pandemic, be- cause of fiscal policies and monetary loosening, start- ups and VCs were flooded with money and SVB saw a huge increase in deposits, which reached $210 billion. In 2021 alone, deposit-taking increased from $100 to $190 billion. Unfortunately, the bank could not increase its loan portfolio at a corresponding pace. When liquidity inundates the market, startups prefer to raise equity, thereby spreading the risk among investors; than borrow money, which implies, instead, taking more proprietary liabilities. Consequently, SVB was left with excess liquidity on its books. In an op-ed for the Italian daily financial newspaper Il Sole 24 ore, Pasquale Merella, FRM, a certified risk manager in Milan, ex- plained that SVB committed thus a fatal mistake. It took the decision to invest its resources in an over- weighted bond portfolio, allocating to fixed income securities a whopping 57% of its total assets, a figure more than twice higher than the average for US banks, which stands at 24%. Furthermore, as much as 78% of SVB’s fixed income exposure was to mortgage-backed securities (MBS), against an industry average of about 20%. In 2008, excessive exposure to MBS was instrumental to Lehman Brothers’ collapse.
SVB’s fixed income portfolio, however, was not a clear and present threat unto itself. It could still be mitigated through sound risk management techniques. Any fixed income portfolio bears interest rate risk: rising rates imply declining prices and, hence, a devaluation of the notional value of securities. For this reason, banks generally hedge their fixed income exposure via interest rate swap (IRS). IRS are derivative instruments that trade fixed-rate cash flows with float- ing-rate ones. By entering an IRS, a bank agrees with a counter party on the swap of interest payments on a like notional value in the same currency, either at a fixed interest rate for floating rate bonds or at a float- ing rate for fixed rate bonds. IRS allow risk managers to adjust interest rate exposure and offset the risks posed by adverse moves. By increasing or decreasing interest rate exposure in various parts of the yield curve, risk managers can either work up or offset their exposure to changes in the shape of the curve.
From a different angle, fixed income portfolios bear duration risk. Duration measures how sensitive a bond’s value may be to interest rate changes. Duration may likewise be hedged. Duration hedging is executed by taking short positions in bond futures. As duration hedging pays out a higher, longer-dated yield and takes in a lower, shorter-dated yield, this re- duces yield. As an example, Goldman Sachs Asset Management (GSAM) offers a duration hedged share class in its fixed income funds, explaining in the range prospectus that “the idea underpinning duration hedging is to simplify the complexity of multi-inter- est rates risks by taking a single risk factor, that is the yield-to-maturity (YTM) of the portfolio and using it as a proxy for the whole term structure.”
Surprisingly, SVB did none of this. It maintained an unhedged bond portfolio worth more than $100 billion with a duration of 5.7 years and an average yield of 1.63%. An industry insider chimed: «It is utterly amazing how exceptionally poorly this portfolio was constructed and how utterly inept the management of it was here».

According to analyst estimates, factoring in a 1:10 leverage ratio, subsequent FED rates rise of 450 basis points in 14 months would cause such a portfolio to in- cur paper losses of $240 billion.

The famous Abraham Lincoln quote goes, «You can fool some of the people all of the time, and all of the peo- ple some of the time, but you cannot fool all of the people all of the time». Yet, SVP thought it could get away without risk management because of an accounting trick. After 2008, reforms to bank accounting rules meant that unrealized losses on securities held on the books would not count against Tier 1 capital.

This is the capi- tal buffer to be maintained against credit exposure to keep banks’ leverage under control. SVP booked virtu- ally all its bond portfolio as “held to maturity” (HTM), thereby avoiding mark-to-market accounting, and hid- ing potential unrealized losses. Or so it thought.

For better or worse, the markets are smarter. As recently as 2022, University of Chicago Booth Business School’s economist Douglas W. Diamond and Washington University in St. Louis Olin Business School’s economist Philip H. Dybvig, together with former Federal Reserve Board (FED)’s Chairman Ben S. Bernanke, were laureate with the Nobel Prize for their studies on bank runs. The Diamond-Dybvig Model postulates that the activity of maturity transformation leaves banks vulnerable to runs. Bank runs occur easily. As depositors worry about solvency, they move their funds elsewhere.

Because bank loans have longer maturities, banks cannot immediately call in the loans, and are forced to execute fire sales, thereby incurring heavy losses, to honor deposi- tor demands. SVB got a taste of this bitter medicine. It lost $42 billion in deposits on March 9 alone. When it rushed to sell $21 billion of assets available for sale to Goldman Sachs (NYSE:GS), it recorded a loss of $1.8 billion in a day. Coupled with a failed attempt to raise $2.5 billion in a rights issue, that rang the bell for the last round. For SVB, it was game over.

The US government took extraordinary steps to prevent the triggering of a potential banking crisis. Amid fears that SVB’s collapse could spread contagion and harm the economy, the Treasury Department, and the Federal Deposit Insurance Corporation (FDIC) announced that all SVB’s depositors would be protected and able to access their money.

At the same time, the FED launched an emergency lending facility to pre- vent a wave of bank runs. The new Bank Term Funding Program (BTFP) offers loans of up to one year in length to banks, savings associations, credit unions, and other eligible depository institutions pledging US Treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral.

These assets will be valued at par. The BTFP is meant to be an additional source of liquidity against high-quality securities eliminating an institution’s need to quickly sell those same securities in times of stress.

Thanks to the scheme, banks will be able to borrow money from the FED, rather than liquidate assets, to honor depositor withdrawals. To the credit of the Biden Administration, it must be said that SVB has not been rescued, and tax- payer money has not been implicated. The FDIC will go ahead with a breakup and liquidation of assets of SVB, since it has been unable to find a suitable buyer to take over the failed bank.

SVB’s British subsidiary has instead been sold in bulk to HSBC (LON:HSBA). HSBC, headquartered in London, is the largest bank in Europe with a balance sheet total of €2,600 billion serving 39 million customers globally. The quick acquisition made customers of SVB UK able to access their deposits and banking services as usual, averting any shock waves on British financial stability.

The transaction has been facilitated by the Bank of England (BOE), in consultation with HM Treasury, using powers granted by the Banking Act 2009. No taxpayer money has been implicated, and customer deposits have been fully protected.

Making use of post-crisis banking reforms, which introduced powers to safely manage the failure of banks, the sale has protected both the customers of SVB UK and taxpayers. The UK has a world leading tech sector, with a dynamic start-up and scale-up ecosystem and HM goverment has welcomed that a private sector purchaser has been found.

Chancellor Jeremy Hunt said: “The Treasury and the BoE have facilitated a private sale of SVB UK; this ensures customer deposits are protected and can bank as normal, with no taxpayer support. The UK’s tech sector is world-leading and of huge importance to the British economy, and [the government] worked urgently to find a solution that provides SVB UK’s customers with confidence.”

The regulators swift action has prevented contagion risk. The markets do not forecast any such risk creeping back. Albeit, it has caused some volatility in sectors of the market, SVB’s demise is seen as an idiosyncratic story rather than a systemic issue. This is not a 2008 repeat: Lehman Brothers’ collapse was a differ- ent ball game. Compared to the defunct New York in- vestment bank, SVB is not significantly leveraged, has no large derivatives exposure, did not engage in proprietary trading, and is less interconnected to the international financial system.

The danger lies elsewhere, though.

The BlackRock Bulletin argued that the market swirls of past weeks do not evidence the prodrome of a banking crisis, but rather of financial cracks resulting from the fastest interest rate hikes since the early 1980s. “The markets – the Bulletin reads – have woken up to the damage caused by rapidly rising interest rates and are now pricing in a recession”. In its highly influential In- vestment Talk, Amundi has likewise ruled out a bank- ing crisis. If anything, their research concurs with Black- Rock that “SVB’s collapse highlights the need to carefully assess the lagging impacts of the tightening cycle.”

As known, rising interest rates can have a negative impact on banks and other financial intermediaries in several ways. First, increased cost of funding. When interest rates rise, the cost of borrowing for banks and financial intermediaries also goes up. The activity of maturity transformation takes a hit: banks’ borrowing costs can increase quickly while the rates they earn on loans may take longer to catch up. This, in turn, can squeeze their net interest margins, which is the difference between the interest earned on loans and the interest paid on deposits.

Second, decreased demand for loans. Higher interest rates can also lead to a decrease in demand for loans as the cost of borrowing becomes more expensive.

This can reduce the loan book, which can further squeeze banks’ margins and profitability. Third, reduced asset values. Rising interest rates can also negatively impact the value of financial assets, such as bonds and stocks, held by banks and other financial intermediaries. Higher rates generally lead to a decrease in the value of fixed-income securities, as the value of these securities moves inversely with interest rates.

This can result in losses on the banks’ investment portfolio and lower capital ratios. Fourth, increased default risk. If interest rates rise too quickly or too high, borrowers may find it difficult to repay their loans, leading to higher default rates. This can result in higher credit losses for banks and other financial intermediaries.

At this point, after twenty years of cheap money, the central banks’ fight to tame inflation will have an impact on the banking sector. The financial position, especially for the smaller, non-systemically important financial institutions, and regional banks, which benefit from looser prudential regulation, will weaken, and, thus, create the risk to spark a crisis of confidence. Sig- nature Bank (NASDAQ:SBNY) and First Republic Bank (NYSE:FRC) are prime examples of collateral damage. Fortunately, their downfall has been managed in due order.

As for the former, its deposits and loans have been acquired by Flagstar Bank, a subsidiary of New York Community Bancorp (NYSE:NYCB). Under the terms of the deal, Flagstar has acquired $12.9 billion of Signature Bank’s loans at a $2.7 billion discount, its deposits, and 40 former SBNY branches, which will soon be renamed Flagstar. As for the latter, a syndicate of eleven US lenders, led by JPMorgan Chase (NYSE:JPM), Bank of America (NYSE:BAC), and Citigroup (NYSE:C), injected $30 billion of liquidity in an endeavor to avert a run.

Because of recent turmoil, central banks are faced with a conundrum and need to strike a new balance between fighting inflation and protecting both economic activity and financial stability. At its March 2023 meeting, the FED deliberated a 25 bps interest rate in- crease, showing vigilance about the impact of continued tightening on the banking sector. This action indicated that the tightening cycle may be nearing an end. This was the ninth hike since March 2022, taking the benchmark federal funds rate to a target range between 4.75%-5%.

However, the Federal Open Market Committee (FOMC) told markets that future increases are not assured and will be largely data-driven: “The Committee will closely monitor incoming information and assess the implications for monetary policy,” the FOMC’s post-meeting statement reads. “The Commit- tee anticipates that some additional policy firming may be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2% over time.”

That wording is a change from previous statements which indicated that “ongoing increases” would be necessary to bring down inflation. Ac- cording to Alexander Kurov, a Professor of Finance and Fred T. Tattersall Research Chair in Finance in the John Chambers College of Business and Economics at West Virginia University, this was a “high-wire balancing act”.

In a comment in Fortune magazine, Kurov wrote that had the FED raised more than the markets expected, it would have sparked further anxiety about instability in the banking sector. On the other hand, had it paused the inflation-fighting campaign, it would have convinced the markets the financial system was broken. Between the risk of a generational inflation and a financial crisis, the FED had to let the markets know it had chosen neither.

By contrast, the situation may turn sour on the other side of the Pond, as the rescue of troubled Credit Su- isse (SIX:CSGN) is unsettling the European markets.

To be sure, there is nothing in common between Credit Suisse and SVB other than an unfortunate timing coincidence. The Zurich-based financial institution collapsed after ten years of poor governance. Its compliance record is dismal on virtually every count from tax evasion to money laundering, from bribery and corruption to fraud, to espionage, even.

In 2014, after it was accused of helping wealthy clients evade taxes by hiding their assets in offshore accounts, the bank plead- ed guilty to criminal charges and paid a $2.6 billion fine to the US Department of Justice (DOJ).

In 2016, the bank was fined £2.4 billion by the UK’s Financial Con- duct Authority (FCA) for the mis-selling of complex financial products, known as “structured products” to its clients.

In 2017, as part of a consent order with the New York State Department of Financial Services (DFS) for violations of New York banking law, including improper efforts with other global banks, front-running client orders, and additional unlawful conduct that disadvantaged customers, the bank agreed to pay a $135 million fine.

The violations were ascertained from an investigation by DFS determining that from at least 2008 to 2015, Credit Suisse consistently engaged in unlawful, unsafe, and unsound conduct by failing to implement effective controls over its foreign exchange business. In 2018, after being accused of money laundering in several countries, including the US, Italy, and France, the bank agreed to pay $536 million to settle charges of violating US sanctions against Iran, Sudan, and other countries.

In 2020, after it was accused of paying bribes to government officials and engaging in corrupt practices in several countries, including China, Russia, and Libya, the bank was fined $47 million by Swiss authorities for failing to prevent corruption in a case involving a former executive of their Asia-Pacific business. Shortly thereafter, Chief Executive Tidjane Thiam’s tenure in the top job was terminated abruptly, after an investigation proved that the bank hired private detectives to spy on its former head of wealth management Iqbal Kahn, who had left for rival UBS (SIX:UBSG).

In 2021, Credit Suisse was involved in the collapse of Greensill Capital.

The firm had invested $10 billion in the opaque lender, leading Swiss financial regulator FINMA to issue a reprimand stating that the bank had “seriously breached its supervisory obligations”.

A mere three weeks after Greensill’s bankruptcy, Credit Suisse lost $5.5 billion when US hedge fund Archegos Capital Management closed down. To mark the bank’s annus horribilis, Portuguese-British banker António Mota de Sousa Horta-Osório had just been hired to serve as the new chairman of the group, when he faced accusations of breaking Switzerland’s Covid-19 restrictions, and resigned after just nine months.

In 2022, Credit Suisse pleaded guilty to defrauding investors as part of the Mozambique “tuna bonds” loan scandal, and paid $475 million to American and British authorities.

The story finally came to an end on March 14, 2023, when Credit Suisse communicated to the US Securities and Exchange Commission (SEC) that it found “material weakness” in its 2021 and 2022 financial reports.

The subsequent sell out forced the Swiss National Bank (SNB) to inject CHF 54 billion of liquidity into the bank’s balance sheet and concoct with UBS for the latter’s take over the former for CHF 3 billion, a 93% discount against tangible book value, in order to thwart a systemic crisis.

However, in doing so, Bern wrote a dark page in the Swiss family book. As part of the rescue, €16 billion of “Additional Tier 1” (AT1) bonds were written off. AT1 bonds are a complex contingent convertible (CoCo) debt instrument issued by banks. “Additional Tier 1” is a regulatory classification of bank capital under the Basel III international regulatory framework.

CoCo bonds combine features of both debt and equity instruments. Like other bonds, they pay regular interest to investors and have a set maturity date, but they also include a “contingent” feature that allows them to be converted into equity under certain predetermined conditions.

The contingency that triggers the conversion into equity can vary, but it typically involves the bank’s capital levels falling below a certain prudential threshold. At this point, the CoCo bond will convert into common equity, helping to shore up the bank’s capital position.

CoCo bonds were introduced in the after- math of the 2008 global financial crisis as a way for banks to strengthen their capital positions and comply with new regulatory requirements. During the financial crisis, many banks suffered significant losses and faced insolvency, which highlighted the need for banks to hold more capital as a buffer against unexpected loss- es.

In response, international regulators introduced new rules under the Basel III regulatory framework that required banks to hold higher levels of capital to improve their resilience and reduce the risk of future financial crises. CoCo bonds were introduced as a way for banks to raise additional capital quickly and efficiently while meeting these new regulatory requirements.

By converting into equity under certain circumstances, CoCo bonds can help boost a bank’s capital position during times of financial stress, helping to reduce the likelihood of insolvency.

Understandably, the decision to wipe off the AT1 bondholders to save, at least partially, the shareholders sent investors on the warpath, prompting the Euro- pean Central Bank (ECB), the European Bank Authority (EBA) and the Single Resolution Board (SRB) to issue a joint statement explaining that equity instruments should be the first to absorb losses, and only after their full use would AT1 debts be required to be written down.

In a quest to reassure the markets, the Euro- pean authorities wrote: “This approach has been consistently applied in past cases and will continue to guide the actions of the SRB and ECB banking super- vision in crisis interventions.”

The BOE likewise said that AT1 bonds rank before the top tier of equity capi- tal, writing in a statement: “Holders of such instruments should expect to be exposed to losses in resolution or insolvency in the order of their positions in this hierarchy.”

In order to complete the deal, Switzerland had also to enact emergency legislation to pre-empt a shareholders’ vote on the sale, further shattering all principles of corporate law and good governance.

The markets flunked the move, throwing the $275 billion AT1 bond market into tumult.

Morningstar, a financial research firm, reported that the Invesco AT1 Capital Bond UCITS exchange-traded fund (LON:AT1P) sank more than 16% on the day of the announcement. Deutsche Bank’s (Xetra:DBK) £650 million 7.125% note fell to 64 pence – its largest ever one-day drop, accord- ing to Bloomberg.

“This move is definitely unexpected”, Gildas Surry, a partner with Axion Alternative Investments, told Bloomberg TV. “There is an issue of confidence and there is an issue of trust with regulators.”

Talking to financial analysis website MarketWatch, Mohit Kumar, chief financial economist in Europe at Jefferies, echoed that sentiment: “The UBS-CS deal might have avoided an immediate risk event, but the AT1 write down has added an uncertainty which could persist for weeks if not months.”

Talking to London daily newspaper The Guardian, Charles-Henry Monchau, chief investment officer of Swiss group Syz Bank, was harsh: “This is an arresting development, given that even unsecured bond- holders usually rank above equity holders in the capital structure.

So – he continued – for equity holders to get ‘something’ and CoCo bond holders to get ‘nothing’ raises serious questions about the real value of CoCo bonds. This is creating contagion risks on CoCos. There is also a risk of spillover effect on global credit.”

Some speculated that the Swiss government was politically motivated and attempted to savage its foreign relations with Saudi Arabia and Qatar. Saudi National Bank (SANB) (XSAU:1180), which is 37% owned by Riyadh’s Public Investment Fund, was Credit Suisse’s largest shareholder and owned 9.9% of its equity capi- tal before it crashed. The Qatar Investment Authority (QIA), Doha’s sovereign wealth fund, was the second largest shareholder and owned 6.8%.

Notwithstanding the insinuation, SANB confirmed to CNBC that it had been hit with a loss of around 80% on its investment in Credit Suisse. But the sell off that led to the bank’s crash is partially the fault of SANB itself, some have argued. On March 15, 2023, after Credit Suisse had reported a CHF 7.3 billion loss for 2022, SANB’s Chairman Ammar Al Khudairy was asked by Bloomberg if it would in- crease its stake in Credit Suisse. His reply was “ab- solutely not, for many reasons outside the simples reason, which is regulatory and statutory.”

The comment triggered investor panic and sent Credit Suisse shares down 30% during the trading session. To many, Al Khudairy’s stance did not make any sense. As the largest shareholder, SANB had the most to lose. Speak- ing noncommittal words against disappointing financial results is tantamount to financial suicide.

Whatever side of the argument one may take, the bail out of the 167 years old Zurich-based financial institution is no happy ending. The merger of Credit Su- isse and UBS will not do any good to Switzerland, whose two “too big to fail” SIFIs (systemically important financial institutions) will coalesce into a humungous operating balance sheet twice the size of the country’s GDP. At CHF 333 billion, local deposits in the combined bank equal 45% of GDP – a huge amount even for a country with sound public finances and low levels of debt.

“There is too much concentration risk and mar- ket share control” JPMorgan wrote in a note to its clients. The Swiss grand finale is a monopoly. In “High- lander,” the best movie to never win an Oscar, the immortals feared only one threat: “there can be only one

By Bepi Pezzulli

Bepi Pezzulli is a Solicitor specialized in banking & finance. As analyst of financial markets, financial regulation, financial architecture, financial stability, and risk management he is also author of several books including “Capitali Coraggiosi” to be published next fall in Italy.