Credit Suisse Turned To Its Own Rich Clients For Emergency Funding

Why rely on central banks when your own clients have more capital than most central banks? That is the question the second biggest Swiss bank asked itself in recent weeks during the unprecedented market crash and collapse in liquidity, when it wasn’t clear when and under what conditions central banks would step in.

As a result, Credit Suisse turned to its own ultra-high-net-worth clients to bolster its balance sheet and its ability to lend as markets sank last month and companies started drawing down credit lines to weather the coronavirus pandemic, according to Bloomberg, which reported that institutional clients, family offices and billionaires were offered notes that pay a 2% interest on money that’s kept with the Swiss lender for a least a year, according to a person familiar with the matter.

The notes, which were issued as a form of structured product, were sold in the first weeks of March to shore up lending capacity as coronavirus infection rates began to rise sharply.

“Structured products are part of our product portfolio, specifically tailored to address the needs of professional investors and wealthy private clients,” Credit Suisse told Bloomberg.

“Typically, those products have terms of several years and can –- depending on their risk profile and lifetime — generate very attractive returns.”

Credit Suisse – and other firms that has issued similar structured notes – have been selling the securities to underpin lending after corporate clients rapidly drew down credit lines afraid banks may lock them out, a pernicious process we described recently in “Banks Suffer Record $200BN In Outflows As Frenzied Companies Draw Down Revolvers” and “”They’ve Left Me High And Dry”: Here Is The Real Reason Companies Have Drawn Down A Record $293 Billion In Revolvers.“

Demonstrating vividly why its critical to have not just very wealthy friends, but even wealthier clients, the structured products drew interest from investors seeking higher yields amid negative interest rates on deposits in Switzerland (yes, 2% is now considered a very high yield). As a result, some clients moved money out of rival banks to buy the notes, according to another person, whose bank has seen investors leave to buy Credit Suisse’s products.

Of course, it’s only a matter of time before the rival banks offer a similar product with a slightly higher rate and the money is moved back from CS to them, but that’s the topic of another story 2 weeks from now.

With negative interest rates of 0.75% on deposits in Switzerland, Credit Suisse and its biggest rival UBS Group AG had previously begun to charge wealthy clients for excess cash holdings, leading to some outflows as investors sought better returns.  While Credit Suisse already has sufficient liquidity –  or so it claimed – it issued the notes to boost lending capacity further in anticipation of a period of increased volatility, a Bloomberg source said, not to mention even greater liquidity needs.

Translation: the worst of the current crisis has yet to pass.