Finance

2 October 2022: Credit Suisse’s increasingly shaky status has implications for many counterparties—hedge funds, pension funds, endowments, users of credit facilities—should the bank collapse or require a rescue which might trigger ‘bail-in’ provisions.

Credit Default Swap spreads on Credit Suisse and other major banks have surged—but these are lagging indicators of potential problems.

Our Drawdown Risk (based on 20-day equity market returns) is an accurate leading indicator of the large share price losses which result in surges in CDS spreads.

In the case of Credit Suisse, by the end of 2021 our analysis indicated that a 20-day drawdown of more than 20% should be expected once in every 60 days and that the average 20-day loss conditional on such an event would be 30%.  Both events occurred in the third week of March 2022.

We had no information about Credit Suisse’s Q4 2021 results would be, or what legal setbacks they would face. We simply measured market data to predict the likelihood and magnitude of loss when bad news hits.

This has historically proved a much better predictor of bank health than CDS spreads and is showing large differences among major banks and across countries.

How much worse can it get? .

The award winning Omega Metrics® technology for finance is based on our fundamental research advances in mathematics and statistics. These provide new insights in the subject of extremes—the study of the ‘tails’ of distributions where the most dangerous market risk events take place.

This allowed us to successfully forecast the March 2020 crash, the implosion of the Short-VIX ETFs in 2018, the impact of the 2016 Brexit referendum on European Banks and many other events since the Crash of 2008.

On Friday 20 May 2022, the S&P 500 Index closed down almost 19% from its 2022 opening day peak. This decline—which has shocked many investors—has taken 97 trading days.

How much worse can it get? .