Investors on Wednesday were so spooked about cracks opening in the global financial system, including at 166-year-old Credit Suisse, that Switzerland’s central bank threw a liquidity lifeline to the systemically important institution, which last year reported $569 billion in assets and is now able to borrow up to 50 billion francs ($53.7 billion) (Bloomberg News).
The bank’s shares soared as markets opened today on news of the Swiss National Bank’s lending decision. Fears after a rough 24-hour period appeared to be allayed.
The U.S. Treasury Department spent Wednesday in contact with global counterparts and monitored evolving developments, which also served to compound U.S. investor anxieties and helped send the Dow Jones Industrial Average down 280 points by the end of the trading day (The Washington Post and The New York Times).
Asked about the impact of Credit Suisse’s problems on the U.S. banking system, Sen. Bernie Sanders (I-Vt.) told Reuters, “Everybody is concerned.”
Credit Suisse’s challenges are not the same as those that sent Silicon Valley Bank, nearly 6,000 miles away in California, into insolvency last week. But the Zurich bank’s higher costs of overnight funding, based on the price of its credit-default swaps, meant it needed to move quickly. It has been battered by years of financial missteps, including huge trading losses and scandals that have cost it two chief executives over three years, the Times reported.
In an international financial system in which Credit Suisse’s tentacles spread in many directions, its vulnerabilities sparked new investor fears and responses that began to feed on themselves. Switzerland’s central bank and FINMA, the country’s financial regulator, vouched for the bank’s overall financial health in a Wednesday statement, but Credit Suisse on Tuesday had conceded problems in its financial reporting controls discovered after queries by the Securities and Exchange Commission.
- Bloomberg News: Credit Suisse fueled a broader rout in European bank stocks.
- MarketWatch: Economist Nouriel Roubini, nicknamed “Dr. Doom,” said if Credit Suisse collapsed, it would be like a Lehman Brothers moment.
- The Guardian: Blackrock CEO Larry Fink, in a letter on Wednesday, said Silicon Valley Bank’s collapse could be the start of a “slow rolling crisis” in the U.S. financial system. Fink sees inflation persisting and interest rates continuing to rise, trends that contributed to SVB’s failure.
Wednesday’s global financial jitters sent analysts back to their crystal balls to forecast whether the Federal Reserve next week will decide to pause rate hikes to help the banking turmoil settle or continue tightening to slay inflation (CNBC). Analysts also want federal regulators to clarify whether backstops provided to SVB and Signature Bank depositors by the government above the $250,000 insurance cap under the Federal Deposit Insurance Corp. extend to account holders elsewhere and into the future.
Sens. Elizabeth Warren (D-Mass.) and Rep. Katie Porter, a Democrat seeking a California Senate seat next year, have crafted a bill along with cosponsors from their party in the House and Senate, that would repeal 2018 changes signed by former President Trump easing restrictions on midsize banks under the Dodd-Frank banking reform law (NBC News). Chances of the legislation attracting GOP support in the absence of a full-blown financial crisis are slim.
The legislative effort also reignites rifts within the Democratic Party. At the time, Warren opposed the GOP-led deregulatory measure that benefited banks such as SVB, but 17 Democrats voted with Republicans in 2018, ensuring passage. Under heavy lobbying by small and midsize banks, lawmakers said financial institutions that did not pose systemic risks akin to the biggest banks were unnecessarily disadvantaged by the Dodd-Frank requirements enacted after the 2008 financial meltdown.
