Credit Suisse Had a Great Awful Quarter

Here is the basic situation at Credit Suisse Group AG. It had a lot of liabilities (bank deposits, derivatives, etc.). It had a lot of assets (bonds, loans, derivatives, etc.). If you valued those assets and liabilities using US generally accepted accounting principles1 — the rules that Credit Suisse uses to publish its financial statements — then the assets were worth quite a lot more than the liabilities, and Credit Suisse was solvent and doing great, last month and also today. If you valued those assets and liabilities using Swiss regulatory capital accounting rules — the slightly different set of rules that Swiss regulators use to decide if Credit Suisse is well capitalized — then, again, the assets were worth quite a lot more than the liabilities, and Credit Suisse was solvent and well capitalized and doing great, last month and also today. Under the somewhat stylized accounting conventions that govern Credit Suisse’s life, Credit Suisse was just fine. It had assets, it had liabilities, the assets were worth more than the liabilities, it was all very normal. “Credit Suisse meets the higher capital and liquidity requirements applicable to systemically important banks,” Swiss regulators announced on March 15.

Then there was a banking crisis and a run on Credit Suisse’s deposits. And in the crisis it turned out that the accounting conventions did not quite reflect economic reality. In particular: