Though it is not my practice to write daily blogs, these are unusual times. As the smoke continues to circulate from the collapse of SIBV and SBNY - it certainly hasn’t cleared - markets focus on other regional banks and one large bank that’s been in trouble for a while - Credit Suisse Group AG (CS).

This morning, CS reported an $8 billion loss for 2022 accompanied by a finding that it discovered “material weaknesses” in its financial reporting for 2021 and 2022 involving “failure to design and maintain an effective risk assessment process to identify and analyze the risk of material misstatements” and various flaws in internal control and communication. This came as a surprise to absolutely nobody in view of the serial acts of gross mismanagement committed by this bank’s executives in recent years including spying on its wealth management chief, losing billions of dollars lending money to Archegos Capital Management, mixing itself up with the failed Greensill Capital, and failing to police rogue employees at its wealth management unit. The only surprise is that anybody who served on the board of this company is still employed in the banking business. At the rate things are going, however, that may not be the case for long because this once respected institution doesn’t look to have much life left in it. With more than $500 billion of dollars of assets, CS’s demise could have serious systemic repercussions.

CS stock was trading at an all-time low of $2.49/share (market cap of $10.165 billion) in the pre-market this morning (it since recovered to $2.54) as the bank continues to experience deposit outflows despite reportedly offering above-market rates to retain depositors. CS has been experiencing a slow-motion bank run for months rather than the much faster one experienced by SIBV last week. But it is at risk of ending up in the same place especially since European banks were saddled with even lower yielding paper than U.S. banks to fund their deposits over the last few years. Presumably European regulators are all over the situation but convincing depositors to stick with such a poorly managed institution is very difficult. It may be necessary for Europe to join America in offering unlimited deposit guarantees to prevent CS from collapsing altogether.

None of this will solve the biggest problem facing banks around the world - massive mark-to-market losses on their bond portfolios. U.S. banks are reportedly sitting on $620 billion of such losses that can only be recovered over years as these bond portfolios run off. European banks, purchasers of negative yielding debt in previous years, are sitting on huge losses as well. Even though most of these assets are high quality and will eventually be repaid, they can only be sold at huge losses at the current time (which is what happened at SIBV). Since bank deposits are the shortest term liabilities in existence (a depositor can demand immediate repayment), the mismatch between bank assets and bank liabilities will persist for a very long time. Accordingly, this situation must be managed carefully by both regulators and bank managements because nobody can snap their fingers and make it go away (other than the Fed but that isn’t going to happen). That is why the government structured the bailout of depositors at SIBV and SBNY to try to prevent further bank runs while the mismatch between assets and liabilities persists. Only a blanket guarantee of deposits can provide the assurance to depositors necessary to buy time to keep their money in banks. It was a prudent but expensive move but the government really had no choice. Criticism of what is clearly a bailout of wealthy depositors is certainly reasonable but we can discuss that another time.

What this means, however, is that the banking system will remain fragile for the foreseeable future. Our biggest banks (JPM, C, BAC and hopefully poorly managed WFC) are sound but the rest of the industry will be on pins and needles as long as they are sitting on large mark-to-market losses. And remember, we are talking about losses on high quality assets without discussing loan losses that will increase as the economy wavers under the weight of higher interest rates that are only now starting to take effect. The complacency that led to January’s stock market rally that I warned about repeatedly is looking more ill-advised by the day (and not just in hindsight). Higher interest rates are toxic for an overleveraged economy. The wages of easy money are coming due and they are going to be paid over time.