Credit Suisse, a 167-year-old, colossal European bank, was teetering on the edge of disaster on Wednesday, heightening concerns about the global financial system. (And, frankly, giving market reporters whiplash as sentiment swung from “holy-crap sell” on Monday to “everyone cool down” on Tuesday to “freakout mode” on Wednesday…)
After the largest one-day selloff in the history of the firm, Credit Suisse management met with Swiss regulators to consider stabilisation alternatives. The Swiss central bank and the nation’s financial market regulator released a joint statement late in the day indicating they would provide a financial lifeline to the bank “if necessary,” emphasising its significance to the broader financial system.
All of this transpired as Wall Street was preparing to close for the day. The market concluded the day in the red, weighed down by banks of all sizes. At the time of writing, the financial world was in limbo, awaiting the outcome of the Credit Suisse catastrophe.
It would be difficult to overestimate the magnitude of Credit Suisse’s demise, given its half-trillion dollars in assets and more than 50,000 people worldwide.
Last week’s failure of Silicon Valley Bank and Signature, two much smaller regional institutions, rocked global investor confidence. Credit Suisse, one of the major lenders in Europe, is “far more globally integrated, with many subsidiaries outside of Switzerland, including the United States,” according to Capital Economics’ chief Europe economist, Andrew Kenningham. Credit Suisse is a worldwide issue, not simply a Swiss one.
As the cool kids say, Credit Suisse is a “globally systemically important bank” (or “G-SIB”). If one of these megabanks is in trouble, people begin to question what is going on with the system and speculate about who may be next to fail.
Even with a financial lifeline from Swiss authorities, Credit Suisse is still riddled with risks and unknowns, putting investors on edge.
Arthur Wilmarth, a professor at the George Washington School of Law, told me that Credit Suisse upheaval implies the crisis has not been addressed.
“I think it was foolish for most people to believe that it could be restricted to a few regional banks,” Wilmarth said. “Clearly, there are still shocks echoing across our own banking system.” And this would suggest that it may potentially spread to very large banks.
What is the connection between Credit Suisse and Silicon Valley Bank?
They are technically incorrect. Yet, herd psychology is a significant driver in the volatile world of financial markets.
Credit Suisse’s troubles are unrelated and have festered for years; they just so happened to intensify at the same time that SVB and Signature were rescued by federal authorities.
Peter Boockvar, the chief investment officer of Bleakley Financial Group, commented, “Credit Suisse has been a slow-moving car disaster for years.” Yet, today’s news is currently occurring in the vortex of SVB.
Thus, there is a great deal of concern regarding the banking industry on both sides of the Atlantic.
The failure of Silicon Valley Bank did not lead Credit Suisse to falter, but it did increase the scrutiny placed on the Swiss bank. As a result, Credit Suisse may have been brought to its knees.
Meanwhile, European and American banks face comparable macroeconomic environment factors. After years of ultra-low (and in the case of Europe, even negative) interest rates, the yields on government bonds, such as U.S. Treasuries, have soared, reducing the value of banks’ underlying assets.
“Today’s events demonstrate that the U.S. and global financial systems have various vulnerabilities of varying sizes, degrees, and locations,” stated Better Markets CEO Dennis M. Kelleher. “These cascading events demonstrate once again that regulation and supervision of the major financial institutions in the United States and the world remain insufficient, partly due to the financial industry’s effective lobbying.”