The hunt for the weakest link in global finance

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Credit Suisse won’t be the last firm to fall under the spotlight

rise and asset prices slump, investors are scrambling to identify the weakest links in the global financial system. Every bear market produces national and corporate victims who get skewered. In the 1997-98 rout Thailand’s economy imploded, as didToday one country has already been picked-off:, where the currency has fallen and the central bank has had to intervene in the bond market to bail-out the pension system, whose overseers had foolishly made vast bets on continued low volatility.

So does the claim on the message boards that Credit Suisse is “next” make sense? At a high level the idea that a big bank, shadow bank or investment firm might be in trouble is plausible. The financial system has become habituated to 15 years of rock-bottom interest rates. The hunt for yield has led insurers and other funds to stuff portfolios with long-duration assets that are ultra-sensitive to rising rates.

Yet in most other respects it does not look like the epicentre of a financial explosion in the way that, say, Lehman, or, an insurer, were. Instead of rampant growth fuelled by hubris, Credit Suisse’s balance sheet has shrunk continuously over the past decade in dollar terms, as it has downsized itself into the second tier of global finance. Today it is the 54th biggest listed financial firm in the world by assets.

Bitter experience from firms such as Deutsche Bank and Royal Bank of Scotland teaches that shrinking an investment bank is a bit like decommissioning a nuclear reactor: dangerous and expensive. Star bankers leave and business dries up faster than you can cut costs and quit long-term contracts, leading to losses.

 

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