Credit Suisse To Become Lehman Brothers 2.0?
In the past week, there has been a lot of talk on social media about how Credit Suisse, Deutsche Bank, or UBS could be about to have their "Lehman Brothers" moment.
The U.S. housing bubble burst, banks that relied heavily on "subprime mortgages" began collapsing, and in September 2008, Lehman Brothers - once one of the top investment banks went bankrupt.
Throughout 2007 and 2008, everyone knew the bank was in difficulty, but most people expected the government would bail it out, as it had done with Bear Stearns.
Instead, the Federal Reserve surprised everyone by permitting a bankruptcy that quickly became the biggest in US history.
Meanwhile, in various locations, Barclays and Nomura purchased Lehman Brothers' investment bank, and Barclays transformed itself into a bulge bracket bank.
All banks must maintain a minimum CSE proportion to their Total Assets or "Risk-Weighted Assets." All banks have a "Allowance for Loan Losses" contra-asset that indicates expected loan losses.
If a bank expects to lose more on its loans, it notes it in the "Provision for Credit Losses" on the Income Statement; unexpected losses also appear here since it raises its Provision.
Since unexpected losses diminish the bank's Net Income and Common Shareholders' Equity (CSE). If this CSE hits $0, Liabilities & Equity must "absorb the losses" as Assets decrease.
To prevent this scenario, banks must keep their CSE and variants such as Common Equity Tier 1 (CET 1) and Tangible Common Equity (TCE) at or above particular thresholds.
In conclusion, Credit Suisse is not similar to Lehman Brothers when we compare CS's Q2 results as of June 30, 2022 to Lehman's last full 10-Q on May 31, 2008.