Credit Suisse is the latest bank to be rescued after the collapse of Silicon Valley Bank sent shockwaves through the global financial markets. Can confidence in the system be restored?
“European markets have closed down more than 3 per cent, spooked by a major sell-off in shares in the Swiss banking giant, Credit Suisse. Coming days after the collapse of the US-based Silicon Valley Bank, it has prompted fears of a full-blown crisis in the sector.”BBC News
Confidence is king when it comes to banking and financial markets and once it’s gone it can lead to disaster.
Credit Suisse – Switzerland’s second biggest lender, and one of the biggest financial institutions in the world – was once seen as too important to fail.
But it’s been on shaky ground for a few years now. In 2022 the bank was fined for involvement in money laundering related to a Bulgarian drugs ring. It was also entangled in a corruption case in Mozambique, among other high-profile scandals.
So when markets got jittery after the collapse of Silicon Valley Bank and other US financial institutions, Credit Suisse found itself in trouble.
“The US government is stepping in to shore up confidence in the banking system, following the sudden collapse of the Silicon Valley Bank.”CNN
“Meanwhile, Signature Bank marks the third largest bank failure in US history. Regulators say all customer deposits will be insured in that case as well.”ABC
“California-based First Republic Bank got a 30 billion dollar rescue package from the country’s biggest financial institutions. The small bank, which specialised in catering to ultra-wealthy individuals, had many uninsured deposits.”Al Jazeera
The troubles in America led the markets to eye others, like Credit Suisse, with suspicion.
So hours before the markets opened on Monday, the bank was acquired by its arch-rival UBS for just over three billion dollars.
“This is a commercial solution and not a bailout. The bankruptcy of Credit Suisse would have had a collateral damage – a huge collateral damage – on the Swiss financial market. Also risk of contagion for UBS and other banks and also internationally.”Swiss Finance Minister
So what links SVB and Credit Suisse – and can confidence be restored?
“My contention is banking should boring, much like watching paint dry, and any time that it isn’t, you’ve got a problem.”CNBC
When banking stopped being boring in 2008 it led to a full-blown financial crisis.
“Tonight, turmoil on the world markets after the collapse of the giant investment bank, Lehman Brothers, sent shockwaves around the globe.”Channel 4
The collapse of SVB earlier this month had such a significant impact, because it was the biggest bank failure since 2008 and the second-biggest in US history.
“The management of these banks will be fired. If the bank is taken over by FDIC, the people running the bank should not work there anymore.”Joe Biden
SVB was a specialised, commercial bank, whose clients were mainly early-to-mid-stage tech companies.
As US President Joe Biden said, its collapse was essentially down to bad management. The bank made risky investments when interest rates were historically low. When rates started to rise in response to rampant inflation, it was exposed.
Eventually the US government had to step in to take over and SVB’s UK arm had to be bailed out too.
“Here in the UK, HSBC has acquired Silicon Valley Bank UK for just £1. The UK government says customer deposits will be protected and no taxpayer money will be used to bail out this bank.”BBC News
But experts say that the collapse of SVB isn’t another Lehman Brothers. And nor, necessarily, is the takeover of Credit Suisse.
Banks are in much better shape than they were in 2008, which is why regulators are keen to stress that the recent issues don’t represent a systemic problem with the banking system.
Both banks faced their own specific problems and had been hit by different scandals which led some clients to move their money elsewhere.
If a bank loses confidence then it leads to disaster and that’s what happened here.
It’s now the job of governments and regulators to restore confidence in the system.
When the markets opened on Monday morning that hadn’t happened yet.
This episode was written and mixed by Patricia Clarke, with additional reporting by Rhys James.