A version of this story appears in CNN’s What Matters newsletter. To get it in your inbox, sign up for free here.
If you went to bed thinking the banking problems were on their way to being solved and woke up to news that another bank – Credit Suisse, based in Europe – was teetering, it would be natural to worry.
Even White House officials and US economists were breathing sighs of relief Tuesday evening Eastern Time. By Wednesday morning, it felt like things had changed.
Far from regional US institutions like the failed Silicon Valley Bank and Signature Bank, Credit Suisse is among the largest banks in Europe and the world.
The details of Credit Suisse’s problems are as distinct as SVB’s, but the fact remains that a European bank is in trouble on the heels of the US Federal Reserve acting decisively to maintain confidence in the US banking system. The US stock market, along with European markets, were reacting to the anxiety.
Get the most up-to-date information from CNN Business.
CNN’s Allison Morrow writes that the coincidence is part of the connection.
“They’re facing unrelated problems that happened to take place at the same time, worrying investors about the banking sector,” according to Morrow, who notes that Credit Suisse has been facing problems for years. She points to one investment analyst who wrote that Credit Suisse’s issues have been sucked into the SVB “vortex.”
“Did the SVB mess cause Credit Suisse shares to tank? No,” writes Morrow. “But are European and US banks facing a similar macro environment of suddenly higher interest rates following a decade or more of low (or even negative) rates? Yes.”
Protecting more banks from social media induced runs
It’s also not entirely clear that regional US banks, while generally thought to be healthy, are out of the woods. Moody’s downgraded the credit ratings of six such banks Tuesday as customers withdrew deposits and put them in larger banks.
As CNN’s David Goldman noted: “The first bank runs of the smartphone era were created by viral social media posts, text chains and instant access to banking apps that exacerbated both widespread concern and rapid customer withdrawals.”
That’s what happened at SVB, according to a helpful flow chart from CNN’s Ramishah Maruf and Tiffany Baker, which explains why the venture capital firms that represented the bulk of SVB’s business began withdrawing funds last week.
When is it a bailout?
The federal government – both the Federal Reserve and policymakers at the White House – acted quickly to ensure that SVB and Signature would have access to funds to cover withdrawals. It was an effort to ensure that bank customers had access to money, but, they argued, without bailing out the banks.
Is it a bailout or not? That’s more of a political than a technical term. There’s clearly some rescue in the government guaranteeing deposits that were not insured, even if they are making sure to leave creditors and shareholders exposed to loss.
CNN’s Nathaniel Meyersohn looks at that term – “bailout” – and how it became a dirty word. He notes that in addition to insuring deposits that had not previously been insured at the failed banks, the Fed also created a new facility to essentially give banks discounted loans to cover deposits as their investments adjust to higher interest rates. It’s intended to keep the crisis from spreading.
Claw back stock sales?
Far from a bailout, the US Department of Justice and Securities and Exchange Commission are opening investigations into SVB’s collapse. They could target millions of dollars in stock sales by SVB executives in the weeks leading up to the bank’s collapse.
Sen. Chris Van Hollen, the Maryland Democrat who sits on the banking committee, said the US should “claw back some of those stock sales” by the executives. “Those that profited on the eve of the collapse need to chip in to help defray the overall costs,” he told CNN’s Kate Bolduan.
Did deregulation cause this?
Progressives like Sen. Bernie Sanders of Vermont have argued that a decision by Congress and then-President Donald Trump to roll back Great Recession-era Wall Street reforms in 2018 helped the SVB problems to go undetected. Several senators have already proposed reinstating those regulations.
CNN’s Daniel Dale fact-checked those claims, which have some merit. Essentially, the 2018 change allowed banks with less than $250 billion in assets to mostly avoid annual stress tests. The banks argued the stress tests were onerous.
Dale notes that SVB’s CEO had urged the deregulation since banks like his did not pose a “systemic” risk to the system. However, Dale talked to experts who opposed the deregulation but still said the stress test likely would not have detected SVB’s exposure to rising interest rates.
Perhaps a larger issue has been a relatively lax approach to banks by the Fed, one expert told Dale.
What about Credit Suisse?
Credit Suisse, unlike SVB and Signature, is a large international bank. It’s also been plagued by long-running problems.
This latest crisis – shares dropped to a record low Wednesday – occurred because the Saudi National Bank refused to take a larger stake in the poorly managed bank for a variety of reasons. Credit Suisse had already announced a massive restructuring in October. Read more about Credit Suisse’s problems.
Meanwhile, in the US, the Federal Reserve committee responsible for adjusting interest rates meets over two days next week and will face major scrutiny.
Inflation has cooled in eight straight months, bringing it down from historic highs, but is still well above the Fed’s normal 2% target. Add to that news the fact that Americans spent less money in February and pulled back more than economists expected, which could presage a larger economic slowdown.
“The question is what is the Fed going to do with these three major stories? We have a situation where people are spending less money, inflation is cooling off, but then all this pressure on the banking system,” said CNN’s Matt Egan.
Stay the course on inflation
The Fed’s one tool to cool inflation and the economy is to raise interest rates.
Thomas Hoenig, the former president of the Federal Reserve Bank of Kansas City and former vice chairman of the Federal Deposit Insurance Corporation, told CNN’s Julia Chatterley Tuesday, before the Credit Suisse news, that the Fed should continue with rate hikes to more completely cure the inflation problem. Watch it.
“They should raise rates, because their primary issue right now is inflation, and they have dealt with this immediate crisis,” he said, referring to the bank problems. Not going forward with rate hikes, he argued, risks something like the 1970s where inflation spun out of control.
“Zero interest rates for over a decade created this problem,” Hoenig argued. “They have to go through, and they have to stay the course and bring this inflationary situation down, or it will only get worse.”
Credit Suisse is not in the Eurozone, but it does business there and European regulators, facing the same conundrum as Fed Chairman Jerome Powell, are still expected to further raise interest rates Thursday in their own fight against inflation.