Silicon Valley Banks collapse should set off alarm bells at financial institutions worldwide. Those words were spoken on Wednesday morning by Axel Lehmann, chairman of European banking giant Credit Suisse. The crisis demands stricter input from regulators and more oversight when it comes to mid-sized banks in the U.S., Lehmann said during a CNBC panel discussion in Riyadh Wednesday, adding that the banking sector needs to take a closer look at managing its fundamentals. But after a dramatic bank stock rout on Wednesday, it looks like Credit Suisse itself could be the catalyst for an even larger banking crisis.
Just as Lehmann was speaking in Saudi Arabia Wednesday, Credit Suisse shares were in the process of sinking to a record low before trading was halted. The rout occurred after the banks largest remaining shareholder, the Saudi National Bank, announced Wednesday it would not be increasing its 9.88% stake in the company, citing regulatory hurdles. We cannot because we would go above 10%. Its a regulatory issue, SNB chairman Ammar Al Khudairy told Reuters Wednesday.
The market was not persuaded by Al Khudairys reasoning, with the sell-off so ferocious that Credit Suisse lost nearly the value of an entire Goldman Sachs and at one point ranked as the worlds 155th-largest bank, as noted by the Financial Times Alphaville blog. Meanwhile, traders piled into credit default swaps, indicating the market expects the bank to default on its debt.
Its the latest in a string of setbacks and even controversies for the Swiss bank, where shares have been hit harder than most by SVBs collapse, something Lehmann hinted at in Riyadh.
Its a warning signal, now we are all coming out of many many years of abundant money supply, he said.
It is still unclear how far the damage of SVBs failure could ripple out. In addition to the European bank stock rout, Signature, a tech- and crypto-focused bank, was seized by federal regulators on Sunday. SVBs collapse has also raised concerns that the Federal Reserves interest rate hikes may be doing more damage to the economy than first presumed, and Fed officials may have to rethink the scope of their tightening campaign at their meeting next week, with potentially big ramifications for inflations trajectory in the U.S.
But the impact of SVBs collapse would be relatively minor compared to the fallout of a Credit Suisse implosion, which could have big impacts on the global economy. A banking crisis due to SVBs collapse seemed to have been momentarily averted last weekend when the government stepped in with extraordinary measures and no further bank runs materialized through Wednesday, but a Credit Suisse default is another matter.
The regulatory response has so far been swift, and decisive actions have helped stave off contagion risks, BlackRock CEO Larry Fink wrote in a letter to investors Wednesday of SVBs cleanup, but he warned that fears persist on more banks failing. Markets remain on edge. Will asset-liability mismatches be the second domino to fall?
Credit Suisse is in principle a much bigger concern for the global economy than the regional U.S. banks which were in the firing line last week, Capital Economics analysts led by Andrew Kenningham wrote in a note to clients Wednesday, referring to the banks large balance sheet and worldwide presence. Credit Suisse is not just a Swiss problem but a global one.
Banking problems pile up
While SVB collapsed in the space of two days, issues with Credit Suisse have been well known to the public for years after a series of mishaps. A corporate spying affair involving executives, a $5.5 billion loss in failed hedge fund Archegos, links to money-laundering for a Bulgarian drug-smuggling crime group, and reports of shredding evidence linking the bank to loans for sanctioned Russian oligarchs are just a few of the scandals that have plagued Credit Suisse in recent years.
Investors are starting to get fed up with the Zurich-based bank, and Harris Associates, a U.S. investment firm and historically Credit Suisses largest historical backer, cut ties with the bank last week, the firms chief investment officer David Herro announced.
There is a question about the future of the franchise, he told the Financial Times of his firms falling confidence in the bank.
On Wednesday, after trading was halted, Credit Suisse appealed to the Swiss National Bank to make a public show of support and reassure investors. The European Central Bank has so far declined to comment publicly on Credit Suisses standing. Speaking in Riyadh, Lehmann declined to comment on whether the bank is in need of government assistance.
Capital Economics analysts wrote that Credit Suisses problems do not come as a complete shock to either investors or government officials. In the event Credit Suisse does fail, having an orderly resolution plan to repay clients and manage the banks wind-down would be critical to ensuring contagion doesnt spread to the rest of the financial system, they added.
Experience suggests that a quick resolution can be achieved without triggering too much contagion provided that authorities act decisively and senior debtors are protected. While regulators will be aware of this, the risk of a botched resolution will be worrying the markets until a solution becomes apparent, they wrote.
The bigger question is whether a Credit Suisse collapse combined with the troubles in the U.S. banking issue represents isolated incidents or a wider crisis within the banking sector, although Credit Suisses long history of scandals and investors backing out may not be a systemic issue.
But Credit Suisses troubles are shared to a lesser extent by other European banks, which have been struggling with profitability for years, Capital Economics noted. The ripple effects could hit U.S. banks too, JPMorgan Asset Management CIO Bob Michele told Bloomberg Wednesday, saying Credit Suisses issues were just the tip of the iceberg and there is a lot more pain yet to come.
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