Credit Suisse will be taking pre-emptive action to strengthen its liquidity, according to a press release issued in the early hours of Thursday, March 16.
The move involves exercising an option to borrow 50bn Swiss francs from the Swiss National Bank under a covered loan facility, as well as a short-term liquidity facility. Both will be fully collateralised by high-quality assets.
But a key point the beleaguered lender also made was the following one:
And this is important because that’s all markets currently care about. If the bank’s duration risk is really fully hedged then the current market panic — which has been largely driven by fears related to the mark-to-market value of bond portfolios — is probably unjustified. Credit Suisse might also be the strongest failing bank we’ve ever seen.
Even so, 50bn Swiss francs is a lot of dough.
A covered loan facility is a new one for the central bank toolkit. Covered bonds are usually massively over-collateralised structures and some of the safest in the market. ChatGPT enlightens us as follows:
A covered loan facility is a type of financing that is guaranteed by a specific pool of assets or collateral. This means that if the borrower defaults on the loan, the lender can recover their losses by seizing and selling the underlying assets. Covered loan facilities are typically used by companies to finance large purchases or investments, and are often structured as revolving credit facilities with a predetermined borrowing limit. These types of loans can be advantageous for borrowers because they typically offer lower interest rates than unsecured loans, since they carry less risk for the lender.
