Banks that trade with Credit Suisse Group AG rushed to safeguard their exposure with the lender on Wednesday, snapping up contracts that will compensate them if the crisis rocking the Swiss lender deepens.
So frantic was the demand for the derivatives, known as credit-default swaps, that they spiked to levels that signal Credit Suisse is in deep financial distress — something unseen at a major global bank since at least the throes of the financial crisis.
The surge came after the chairman of the lender’s biggest shareholder, Saudi National Bank’s Ammar Al Khudairy, said it doesn’t want to boost its stake in the lender for regulatory reasons.
Banks rushing to buy the CDS to reduce their counterparty risk exacerbated the move, according to people with knowledge of the matter.
Chaotic Day
In a chaotic day of trading, quotes for one-year credit default swaps were considerably more expensive than the offers for longer durations as lenders tried to give themselves a near-term shield from their exposure to the lender, the people said.
Bid-ask spreads were as much as 10 points apart upfront, they added, asking not to be named because they aren’t authorized to speak publicly. So far, the moves are limited to Credit Suisse and haven’t spread to other lenders. The bank declined to comment.
Banks buy and sell derivative contracts and other instruments constantly, meaning they assume counterparty risk when they take the other side of a trade. When the default risk of a lender increases, it can lead to mark-to-market losses known as a credit valuation adjustment even if the institution meets its obligations.
Hedging Risk
“CVA desks need to hedge counterparty risk,” said Jochen Felsenheimer, a portfolio manager at XAIA Investment. “Assuming they have been hedged at the end of 2022, they still have to hedge additionally on recently opened trades and against mark-to-market losses.”
Even if the trades are limited in…