Swiss franc ‘nuclear explosion’ spreading

Credit Suisse Group AG and Saxo Bank A/S joined an increasing number of European financial companies warning that the Swiss central bank’s surprise decision to abolish its currency ceiling may dent earnings.

Credit Suisse, Switzerland’s second-biggest bank, indicated Monday that currency swings may hurt profit. Denmark’s Saxo Bank said some clients might not be able to settle unsecured amounts, which might cause undisclosed losses.

The full force of the decision won’t be known for months and is “closer to a nuclear explosion than a 1,000-kilogram conventional bomb,” Javier Paz, senior analyst in wealth management at Aite Group, said in an email Tuesday. “The aftermath is like a black hole that can suck massive amounts of credit from currency trading as we have known it.” 

Citigroup Inc., Deutsche Bank AG and Barclays Plc suffered about $400 million in cumulative trading losses, people familiar with developments said last week. At Morgan Stanley, owner of the world’s largest brokerage, Chief Financial Officer Ruth Porat said the effect was minimal.

“We made money the last few days and we’ve helped our customers, but it hasn’t had a big impact on us,” Bank of America Corp. Chief Executive Officer Brian T. Moynihan told CNBC in an interview. “It caught everybody by surprise.”

Thomas Peterffy, the billionaire chairman and chief executive officer of Greenwich, Connecticut-based Interactive Brokers Group Inc., said that he expects banks’ losses from the currency swings to increase as customers can’t repay loans. Interactive Brokers disclosed on Jan. 16 that it could suffer as much as $120 million in losses from clients who got the Swiss franc trade wrong. Peterffy said leverage may increase the losses at banks.

“To the extent that banks dealt on 2 percent margin, the losses must be humongous,” Peterffy, 70, said in a telephone interview. “In the ensuing weeks and months, they are hoping to collect. They don’t always.”

The franc soared as much as 41 percent against the euro and strengthened against other currencies after the Swiss National Bank scrapped the three-year-old policy on Jan. 15. The Swiss currency climbed on Tuesday amid a continuing fallout.

The global turmoil comes as global leaders are meeting at the World Economic Forum in Davos, Switzerland. Participants include Barclays CEO Antony Jenkins, Deutsche Bank coCEO Anshu Jain and UBS Group AG Chairman Axel Weber.

Citigroup, Deutsche Bank, Barclays and UBS are the world’s largest four currency dealers, accounting for almost 54 percent of the global foreign-exchange business, according to Euromoney Institutional Investor Plc’s annual survey. Bank of America, Morgan Stanley and Credit Suisse ranked 7th, 11th and 12th.

All of the largest currency dealers have lost veteran traders since global authorities began investigating claims that benchmark rates were being manipulated. Citigroup fired its European head of foreign-exchange spot trading last year, and Deutsche Bank dismissed several currency traders amid internal reviews related to the probes. Barclays and UBS AG have each suspended about half a dozen employees. (Bloomberg)