The moves are being exacerbated by banks rushing to buy protection against a possible default by the Zurich-based firm to reduce their counterparty risk on trades, according to people with knowledge of the matter.
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 said, 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 one of the lenders increases, it can lead to mark-to-market losses known as a credit valuation adjustment even if the lender does not default.
“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 hedging is limited in size, it has a dramatic impact on prices because of thin volumes, he added.The spike in CDS quotes highlights the jitters among bankers and money managers after the failure of Silicon Valley Bank last week sparked concerns about potential contagion in the financial system. Credit Suisse’s shares and bonds plunged after the chairman of Saudi National Bank made the comments about the shareholding, which stands at just under 10%.
The Zurich-based lender, which is in the middle of a complex three-year restructuring, has been struggling to contain deposit outflows. While the bank has insisted that its financial position is sound, the spiking CDS prices are causing turmoil in the market.
