Bank fears spread to Europe as Credit Suisse, other big lenders see shares drop
Turmoil prompted pause in trading of Credit Suisse shares on Swiss market
Fears about the world banking system spread to Europe on Wednesday as shares in the globally connected Swiss bank Credit Suisse plunged and dragged down other major European lenders in the wake of bank failures in the United States.
At one point, Credit Suisse shares lost more than one-quarter of their value, hitting a record low after the bank's biggest shareholder — the Saudi National Bank — told news outlets that it would not put more money into the Swiss lender, which was beset by problems long before the U.S. banks collapsed.
The turmoil prompted an automatic pause in trading of Credit Suisse shares on the Swiss market and sent shares of other European banks tumbling, some by double digits. That fanned new fears about the health of financial institutions following the recent collapse of Silicon Valley Bank and Signature Bank in the U.S. in recent days.
Speaking on Wednesday at a financial conference in the Saudi capital of Riyadh, Credit Suisse chairman Axel Lehmann defended his bank when asked about management issues, saying, "We already took the medicine" to reduce risks.
When asked if he would rule out government assistance in the future, he said "that's not a topic.... We are regulated, we have strong capital ratios, very strong balance sheet, we are all hands on deck, so that's not a topic whatsoever."
Central bank prepared to act
But Switzerland's central bank announced late Wednesday that it was prepared to act, saying it would support Credit Suisse if needed. A statement from the bank did not specify whether the support would come in the form of cash, loans or other assistance. At the moment, regulators said, they believe the bank has enough money to meet its obligations.
Credit Suisse then said early Thursday that it is taking measures to shore up its finances, including exercising an option to borrow up to 50 billion Swiss francs ($73 billion Cdn) from the central bank.
"This additional liquidity would support Credit Suisse's core businesses and clients as Credit Suisse takes the necessary steps to create a simpler and more focused bank built around client needs," the bank said.
A day earlier, Credit Suisse reported that managers had identified "material weaknesses" in the bank's internal controls on financial reporting as of the end of last year. That fanned new doubts about the bank's ability to weather the recent storm.
Credit Suisse stock dropped about 30 per cent, to about 1.60 Swiss francs ($2.36 Cdn), before clawing back to a 24 per cent loss at 1.70 francs ($2.51 cdn) at the close of trading on the SIX stock exchange. At its lowest, the price was down more than 85 per cent from February 2021.
After the joint announcement from the Swiss National Bank and the Swiss financial markets regulator, the shares also made up some ground on Wall Street.
The stock has suffered a long, sustained decline: In 2007, the bank's shares traded at more than 80 francs ($118.07 Cdn) each.
With concerns about the possibility of more hidden trouble in the banking system, investors were quick to sell bank stocks.
France's Société Générale SA dropped 12 per cent at one point. France's BNP Paribas fell more than 10 per cent. Germany's Deutsche Bank tumbled eight per cent, and Britain's Barclays Bank was down nearly eight per cent. Shares in the two French banks were also briefly suspended.
The STOXX Banks index of 21 leading European lenders sagged 8.4 per cent following relative calm in the markets on Tuesday.
'A much bigger concern'
The turbulence came a day ahead of a meeting by the European Central Bank.
Bank president Christine Lagarde said last week, before the U.S. failures, that the bank would "very likely" increase interest rates by a half percentage point to fight against inflation. Markets were watching closely to see if the bank carries through despite the latest turmoil.
Credit Suisse is "a much bigger concern for the global economy" than the midsize U.S. banks that collapsed, said Andrew Kenningham, chief Europe economist at Capital Economics in London.
It has multiple subsidiaries outside Switzerland and handles trading for hedge funds.
"Credit Suisse is not just a Swiss problem but a global one," he said.
Kenningham noted, however, that the Swiss bank's "problems were well known so do not come as a complete shock to either investors or policy-makers."
The troubles "once more raise the question whether this is the beginning of a global crisis or just another 'idiosyncratic' case," he said in a research note. "Credit Suisse was widely seen as the weakest link among Europe's large banks, but it is not the only bank which has struggled with weak profitability in recent years."
The Swiss National Bank declined to comment. The Swiss Financial Market Supervisory Authority did not immediately respond to calls and emails seeking comment.
Investors responded to "a broader structural problem" in banking following a long period of low interest rates and "very, very loose monetary policy," said Sascha Steffen, professor of finance at the Frankfurt School of Finance & Management in Germany.
In order to earn some yield, banks "needed to take more risks, and some banks did this more prudently than others," he said.
Investors are now worried that banks "have risks on their balance sheet that they don't know about and therefore have accumulated significant losses that haven't been yet realized."
European finance ministers said this week that their banking system has no direct exposure to the U.S. bank failures.
Analysts say Europe has strengthened safeguards around its banking system since the global financial crisis that followed the collapse of U.S. investment bank Lehman Brothers in 2008.
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Markets fall after key Silicon Valley bank collapses
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Silicon Valley Bank collapse marks 2nd biggest bank failure in U.S. history
Bank, the 16th largest in U.S., failed after depositors hurried to withdraw money
Regulators rushed Friday to seize the assets of one of Silicon Valley's top banks, marking the largest failure of a U.S. financial institution since the height of the financial crisis almost 15 years ago.
Silicon Valley Bank, the 16th-largest bank in the U.S., failed after depositors hurried to withdraw money this week amid anxiety over the bank's health. It was the second biggest bank failure in U.S. history after the collapse of Washington Mutual in 2008.
The bank served mostly technology workers and venture capital-backed companies, including some of the industry's best-known brands.
"This is an extinction-level event for startups," said Garry Tan, CEO of Y Combinator, a startup incubator that launched Airbnb, DoorDash and Dropbox and has referred hundreds of entrepreneurs to the bank.
"I literally have been hearing from hundreds of our founders asking for help on how they can get through this. They are asking, 'Do I have to furlough my workers?'"
Little chance of chaos spreading
There appeared to be little chance of the chaos spreading in the broader banking sector, as it did in the months leading up to the Great Recession. The biggest banks — those most likely to cause an economic meltdown — have healthy balance sheets and plenty of capital.
Nearly half of the U.S. technology and health-care companies that went public last year after getting early funding from venture capital firms were Silicon Valley Bank (SVB) customers, according to the bank's website.
The bank also boasted of its connections to leading tech companies such as Shopify, ZipRecruiter and one of the top venture capital firms, Andreesson Horowitz.
Tan estimated that nearly one-third of Y Combinator's startups will not be able to make payroll at some point in the next month if they cannot access their money.
Internet
TV provider Roku was among casualties of the bank's collapse. It said
in a regulatory filing Friday that about 26 per cent of its cash — $487
million US — was deposited at Silicon Valley Bank. (Justin Sullivan/Getty Images)
Internet TV provider Roku was among casualties of the bank collapse. It said in a regulatory filing Friday that about 26 per cent of its cash — $487 million US — was deposited at Silicon Valley Bank.
Roku said its deposits with SVB were largely uninsured and it didn't know "to what extent" it would be able to recover them.
As part of the seizure, California bank regulators and the FDIC transferred the bank's assets to a newly created institution — the Deposit Insurance Bank of Santa Clara. The new bank will start paying out insured deposits on Monday. Then the FDIC and California regulators plan to sell off the rest of the assets to make other depositors whole.
Failure unfolded rapidly
There was unease in the banking sector all week, with shares tumbling by double digits. Then news of Silicon Valley Bank's distress pushed shares of almost all financial institutions even lower Friday
The failure arrived with incredible speed. Some industry analysts suggested Friday that the bank was still a good company and a wise investment. Meanwhile, Silicon Valley Bank executives were trying to raise capital and find additional investors. However, trading in the bank's shares was halted before stock market's opening bell due to extreme volatility.
An employee checks his phone after arriving to work on Friday to SVB's shuttered headquarters. (Justin Sullivan/Getty Images)
Shortly before noon, the FDIC moved to shutter the bank. Notably, the agency did not wait until the close of business, which is the typical approach. The FDIC could not immediately find a buyer for the bank's assets, signaling how fast depositors cashed out.
The White House said U.S. Treasury Secretary Janet Yellen was "watching closely." The administration sought to reassure the public that the banking system is much healthier than during the Great Recession.
"Our banking system is in a fundamentally different place than it was, you know, a decade ago," said Cecilia Rouse, chair of the White House Council of Economic Advisers.
"The reforms that were put in place back then really provide the kind of resilience that we'd like to see."
People try to access the Park Avenue location of SVB, in New York City, on Friday. (David 'Dee' Delgado/Reuters)
In 2007, the biggest financial crisis since the Great Depression rippled across the globe after mortgage-backed securities tied to ill-advised housing loans collapsed in value. The panic on Wall Street led to the demise of Lehman Brothers, a firm founded in 1847.
Because major banks had extensive exposure to one another, the crisis led to a cascading breakdown in the global financial system, putting millions out of work.
At the time of its failure, Silicon Valley Bank, which is based in Santa Clara, Calif., had $209 billion US in total assets, the FDIC said.
It was unclear how many of its deposits were above the $250,000 insurance limit, but previous regulatory reports showed that lots of accounts exceeded that amount.
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