Banking sector unease continues to weigh down share markets, in spite of attempts by authorities to reestablish confidence.
Credit Suisse, a prominent Swiss lender, experienced an accelerated sell-off on Friday, causing both European and US indexes to fall.
Markets React to Credit Suisse Decline
Credit Suisse shares dropped by 8%, while shares in First Republic, a US-based bank, fell 20% following a recent capital infusion from major US banks. The FTSE 100 concluded with over a 1% loss. French and German exchanges also closed lower, and in early afternoon trading in New York, the Dow Jones Industrial Average index was down by 1.1%. The Nasdaq and S&P 500 indexes similarly fell.
Investor Apprehension over Credit Suisse Weakness
Earlier this week, Credit Suisse alarmed investors by acknowledging a “material weakness” in its financial reporting. The Saudi National Bank, its largest shareholder, announced it would not provide further funds. The Swiss National Bank granted the struggling, unprofitable institution a £45 billion emergency lifeline, but investor concerns persist.
Financial services company Morningstar reported that approximately $466 million has exited Credit Suisse’s European and US managed funds recently. Morningstar analysts Niklas Kammer and Johann Scholtz claimed that the problems at Credit Suisse are “idiosyncratic in nature and we believe containable for now even in a worst-case scenario.” However, they also cautioned that rapidly unfolding developments could render their current assessments obsolete.
The troubles at Credit Suisse, which employs about 50,000 people globally (including 5,000 in London), coincide with the collapse of two US lenders—Silicon Valley Bank (SVB) and Signature Bank—fueling concerns about the overall banking system’s health.
Efforts to Mitigate Panic and Preserve Stability
US regulators intervened over the weekend to ensure SVB and Signature Bank customers had full access to their funds, aiming to prevent further panic. However, worries persist that other banks, such as San Francisco-based First Republic, might be susceptible to customers withdrawing their deposits en masse. First Republic’s shares have plummeted by nearly 70% in the past week.
Eleven US banks declared support for First Republic on Thursday, expressing “confidence in the country’s banking system.” US financial officials praised the move, calling it “most welcome” and a testament to the banking system’s resilience.
Central Banks Respond to Inflation Concerns
Central banks worldwide have significantly increased borrowing costs over the past year to combat inflation. This has negatively impacted the value of large bond portfolios purchased by banks when rates were lower, contributing to Silicon Valley Bank’s collapse and raising questions about other firms’ potential vulnerabilities.
On Friday, SVB Financial Group, the parent company of Silicon Valley Bank, filed for bankruptcy protection to facilitate the sale of its remaining assets.
Jeffrey Cleveland, chief economist at US asset manager Payden and Regal, warned that other banks might encounter similar issues. He noted, “There could be other vulnerabilities… if central banks are intent on continuing to raise interest rates.”
Before the banking sector’s recent turmoil, both the US Federal Reserve and the Bank of England had anticipated further interest rate hikes at upcoming meetings. However, some speculate that these increases may be reduced or even abandoned in light of recent events. On Thursday, the ECB announced a further increase in interest rates, from 2.5% to 3%.
