The Fed's Bit Part in the Credit Suisse Saga

Pardon my French

The Swiss Parliament’s investigative commission on the failure of Credit Suisse released the most exhaustive postmortem yet — 566 pages of details in French.

The machine-translated version reads less romantically, but is more decipherable. There are some interesting new bits on the Fed’s (mini) role, which are laid out below. (It’s not an exhaustive list, just the ones I found notable.)

As a reminder, Credit Suisse had a business model in peril for years—which ultimately led to a preseason run that started in October 2022, continued slowly for months, and culminated in fatal run in March 2023, a week after “SVB weekend” in the US. The death knell for Credit Suisse was its largest shareholder saying the words “absolutely not” on Bloomberg TV when asked if they’d put any more capital into Credit Suisse; this was on Wednesday, March 15. The merger with UBS was announced that Sunday, March 19.

Prior to this parliamentary report, we knew the Fed lent—between March 15 and March 22—at least $60 billion to the Swiss National Bank (SNB) through the Fed’s FIMA Repo Facility, for the benefit of their lending to Credit Suisse. I say “at least” for two reasons:

• SNB Governing Board Member Antoine Martin said that “almost half” the USD 182 billion of liquidity assistance extended was provided in dollars—and that the SNB relied mainly on the FIMA, which lends dollars against US Treasury holdings, to source dollars.

• The SNB reported that it had to post $75 billion of collateral to the FIMA facility, which would make little sense for a $60 billon loan from a Treasury facility with minimal to zero haircuts.¹

Okay, onto the new report’s interesting Fed bits, with the pdf screenshots courtesy of Google Translate (and the pursuant asterisk that nothing should be seen to be verbatim):

When the first exodus of funds from Credit Suisse began in October 2022, the Fed got uncomfortable with Credit Suisse’s US subsidiary drawing down its liquidity buffer and heightened its liquidity reporting requirements:

In cross-border discussions in November 2022, the Fed spurned the idea of Credit Suisse’s savior being a US bank:

The footnote cites concern about contagion to the US:

Come that fateful March 15, 2023, after the largest shareholder said no to the idea of injecting more capital, the NY state regulators apparently looked to ring-fence the US Credit Suisse operation, with the Fed having to talk them down:

The report says that on Thursday, March 16, the Fed said it could not rule out the default of the US subsidiary if no liquidity support was forthcoming,² and it (perversely?) asked for a higher liquidity buffer:

Indeed, that weekend, the Fed raised the US subsidiary’s liquidity requirement by $8 billion (about 30%):

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1. The Fed says the FIMA facility’s haircuts mirror the discount window's; the discount window typically charges very small haircuts—1% to 5%—on Treasury collateral. Moreover, the Fed had cut discount window haircuts to 0% at the time (relative to fair value). Was the SNB quoting the face value of its collateral? (Seems unlikely.) Did the Fed demand extra collateral? (Possible, but also seems unlikely. The SNB also has a swap line, which would only require francs as collateral.) Did the SNB borrow more than $60 billion from the FIMA? (Possible, but it doesn’t show up definitively in the Fed’s weekly balance sheet data. The weekly data show a peak of $60 billion on March 22 and weekly averages don’t give away if there was any day above $60 billion.) Notably, the Fed Foreign Currency Subcommittee needs to approve any FIMA loan over $60 billion; that subcommittee is the FOMC chair (Powell), its vice chair (NY Fed President Williams), and the Board Vice Chair (which was vacant at the time, Brainard had left and Jefferson wasn’t in yet).

2. Post Dodd-Frank, the Fed cannot do any Section 13(3) lending for the benefit of one particular institution; such emergency programs must be “broad-based.” Credit Suisse USA did not have a US depository that could borrow from the discount window.