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Credit Suisse – While the United States is dealing with a significant financial crisis, Europe faces a similar problem.
On Wednesday, 167-year-old European bank Credit Suisse was on the brink of failure.
With the two financial institutions dealing with their unique problems, investors have grown anxious regarding the health of the global financial system.
The Swiss situation
Following the bank’s most major single-day selloff, Credit Suisse executives met with Swiss authorities to scour options to help the bank stabilize.
Late in the day, the central bank and the country’s financial market regulator released a joint statement, saying they would provide an economic lifeline if needed, emphasizing the bank’s importance to the broader financial system.
The whole situation unraveled when Wall Street was preparing to clock out.
The day then concluded with lowered stocks that prominent and small banks dragged.
With the financial world in limbo, all eyes are on Credit Suisse as people wait to see how the crisis plays out.
Experts are still weighing in on how massive it would be for Credit Suisse to collapse.
The Swiss bank employs more than 50,000 people worldwide and holds half a trillion dollars in assets, making it hard to overstate the impact of a potential collapse.
Last week, two lenders also fell: Silicon Valley Bank and Signature.
SVB and Signature
Signature and Silicon Valley Bank are smaller regional lenders than Credit Suisse.
However, their failures have stirred investor confidence worldwide.
Over the weekend, the Treasury Department, the Federal Reserve, and the Federal Deposit Insurance Corporation released a joint statement saying they were taking necessary measures to protect all depositors.
The statement accounted for Silicon Valley Bank and Signature Bank.
The decision allows customers to access insured and uninsured deposits from the “bridge bank” that the FDIC created for SVB and Signature deposits.
Because they are FDIC-insured, depositors are insured up to $250,000 for each account ownership category.
However, some customers could be insured for more if they had more than one type of deposit account.
Read also: Bank stocks have become a prospect amid recession fears
The bank’s importance
Credit Suisse is one of the most prominent lenders in Europe.
According to Andrew Kenningham, the chief European economist at Capital Economics, the bank was “much more globally interconnected, with multiple subsidiaries outside Switzerland, including in the US.”
“Credit Suisse is not just a Swiss problem but a global one,” he said.
The lender is a “global systemically important bank” or “G-SIB.”
When even one megabank is in a crisis, people immediately speculate on the system’s status and wonder who would fall next.
Despite the financial lifeline Swiss authorities provide, there are still various risks and unknowns from Credit Suisse, making investors worry.
According to George Washington School of Law professor Arthur Wilmarth, the Credit Suisse fiasco proves the financial crisis has not been contained.
“I think it was naive for most people to think that it might be contained just with a couple of regional banks, because clearly there are still shocks reverberating within our own banking system,” said Wilmarth.
“And this would indicate that it could potentially spread to banks of a very large size.”
The financial market
Although Silicon Valley Bank and Credit Suisse are not directly connected, they are still two significant entities in the financial markets.
The Swiss lender is faced with problems that have plagued it for years, escalating at the time as SVB and Signature have undergone troubles requiring the federal authorities’ help.
Peter Boockvar, Bleakley Financial Group’s chief investment officer, noted the situation:
“Credit Suisse has been a slow-moving car crash for years. But now, today’s news of course is happening in the vortex of SVB.”
The lender’s situation leads to anxiety in the banking sectors for both sides of the Atlantic.
Increased scrutiny
Silicon Valley Bank’s failure didn’t directly contribute to Credit Suisse’s situation but put the bank under intense scrutiny.
The pressure might have helped the selloff to bring Credit Suisse to its knees.
European and US banks face similar macroeconomic environmental factors.
Years of low (and negative in Europe) interest rates led to yields on government bonds like Treasuries shooting up, ruining the bank’s underlying asset’s value.
“Today’s events show that there are numerous vulnerabilities of different sizes, degrees and locations in the US and global financial system,” Dennis M. Kelleher, CEO of Better Markets.
“These cascading events illustrate again that regulation and supervision of the largest financial institutions in the United States, and indeed the globe, continues to be insufficient, largely because of successful lobbying by the financial industry.”
