The week-old banking crisis showed no signs of concluding Thursday, as European banking behemoth Credit Suisse continued to flirt with a disaster of its own making.
Last night, after Credit Suisse’s stock got crushed, the bank agreed to take a nearly $54 billion lifeline from Switzerland’s central bank. That’s a lot of cash, but it may not be nearly enough.
Markets reacted with a jolt of optimism that quickly fizzled. Asian and European markets fell, and the US was set to open lower.
JPMorgan analysts said in a note to investors that allowing Credit Suisse to continue feebly limping along is “no longer an option.” The market is losing confidence in Credit Suisse, whose shares were up Thursday after a record 24% drop the day before.
One way out of this mess, the analysts said, would be for Credit Suisse’s larger rival, UBS, to step in and buy it. No word yet from UBS on that front.
Credit Suisse has been flailing for years, hurt by risk-management missteps that tarnished its reputation with clients and investors, and cost several top executives their jobs.
The question on everyone’s mind is: What will happen to Credit Suisse, and who will be the next to fall?
“The problems at Credit Suisse are very different to those that brought down SVB a few days ago,” noted Neil Shearing, Group Chief Economist of Capital Economics. “But they serve as a reminder that as interest rates rise, vulnerabilities are lurking in the financial system.”
Who’s next?
In the United States, First Republic (FRC) is the consensus choice to be the next domino.
Fitch Ratings and S&P on Wednesday both downgraded the bank’s credit rating over concerns that depositors could pull their cash despite federal intervention. The bank is reportedly exploring strategic options, including a sale, according to Bloomberg. First Republic’s stock fell 35% in morning trading.
On Thursday, Fitch put Western Alliance bank (WAL) on notice, saying its credit rating could fall if customers continued to pull money out of the bank. Shares of Western Alliance, a regional bank like SVB, fell 16%. PacWest Bank (PACW) was down 12%, and shares of other regional banks fell again, too.
Customers continue to shun regional banks despite government intervention. Although nothing close to SVB’s collapse has taken place this week, many customers have pulled money from smaller banks and put their funds in larger banks. Bank of America, Wells Fargo and Citigroup have all received a significant increase in deposits since Silicon Valley Bank ran into trouble last week, people familiar with the matter told CNN.
Regulators continued to try to calm nerves. US Treasury Secretary Janet Yellen, testifying before Congress Thursday, said the banking system remains secure. The Office of the Comptroller of the Currency, a key US banking regulator, said Thursday it was stepping up oversight of the industry.
Bottom line: Credit Suisse will probably need to be taken over (the most likely outcome, according to JPMorgan) or bailed out. The Swiss government’s backstop pledge Wednesday night suggested authorities won’t let the bank fail, because doing so would put the entire system at risk. US regional banks may need more support.
Volatility and confusion are likely to stick around until regulators or some other white knight step in for a bigger rescue plan.
