What's going on?

Every action has an equal and opposite reaction, and this one�s a doozy: investment bank Credit Suisse revealed a $4.7 billion loss following the blow-up of Archegos Capital Management.

What does this mean?

If the name �Archegos� rings a bell, it�s because the investment firm hit the headlines last week after dumping its holdings to cover losses from a few ill-advised bets. And since the company had been paying for them by borrowing heavily from the world�s banks, those same banks could now be facing $10 billion worth of losses � almost half of which has fallen on Credit Suisse�s shoulders.

That�s expected to push the firm to a $1 billion loss last quarter, and could help explain why it�s trying to preserve its cash by cutting its dividend and freezing share buybacks. And considering this is the second time in the last few months that the bank�s short-sighted lending has led to big losses, the firm announced it�s replacing the heads of its risk and investment banking departments too. Go figure.

Why should I care?

For markets: Watch for banks� earnings later this month.
Credit Suisse won�t be the only bank with an Archegos-shaped stain on its balance sheet, but at least the sector�s had a strong quarter otherwise. Banks� trading departments have benefited big from market volatility and record trading volumes, while their investment banking segments have done brisk business from a record number of mergers and acquisitions. Exactly how brisk will become clearer when they report earnings later this month�

The bigger picture: Interest rates take with one hand, give with the other.
Investors might�ve been spooked by rising long-term bond yields last quarter, but banks were much more upbeat about them. See, short-term bond yields stayed relatively flat, and since banks borrow money at short-term rates and lend money at long-term rates, a wider gap between the two means banks were able to pocket more profit (tweet this).