On Wednesday, a headline started spreading across Europe, then Wall Street, causing panic among investors. The market was facing another banking crisis due to the failure of Credit Suisse, a Swiss bank. The bank's shares tumbled more than 20%, and the sell-off spread from European banks to U.S. stock index futures, leaving the Dow industrials down over 500 points early Wednesday. But how does this meltdown affect U.S. investors, and what could be the possible consequences?
Negative Sentiment and Possible Global Banking Crisis
The failure of a Swiss bank like Credit Suisse may not have direct consequences for U.S. investors, but it is extremely negative for sentiment, especially hot on the heels of SVB/SBNY. The market will be wondering who's next, and it could start to have the optics of a global banking crisis, rather than an idiosyncratic failure of a niche US regional bank.
Market Turmoil and Contagion Risk
The Stoxx Europe 600 banking sector tumbled 7%, with the heaviest regional losses focused on Switzerland, the bank-heavy countries of Spain and Italy. Among U.S.-listed banking shares, Credit Suisse stock echoed the Zurich losses, while Deutsche Bank fell nearly 10% and Banco Santander fell 9%. The market turmoil caused by the Swiss bank's meltdown may have contagion effects on other banks globally, including the US.
Credit Suisse's Risky Business
The failure of Credit Suisse is not surprising, considering that the Swiss bank has seen five straight losing quarters. It has billions worth of exposure to the collapsed Archegos family office and was forced to freeze $10 billion worth of funds tied to Greensil Capital. Credit Suisse has embarked on a revamp as it seeks to move away from its past, including admitting financial control weaknesses.
Possible Bailout and Swiss National Bank's Intervention
Following the lifeline U.S. regulators gave depositors of Silicon Valley Bank and Signature Bank, Credit Suisse may be lining up for its own bailout. Despite Credit Suisse's protests, it is looking inevitable that the Swiss National Bank (SNB) will have to intervene and provide a lifeline. The SNB and the Swiss government are fully aware that the failure of Credit Suisse or even any losses by deposit holders would destroy Switzerland's reputation as a financial center. The plummeting share price of the bank and soaring yield on bonds is "mimicking Silicon Valley Bank's recent collapse in a frightening way. In terms of the outflow of deposits, Credit Suisse's position looks even worse," said Otavio Marenzi, CEO of Opimas.
Possible Run on Large Institutional Deposits
Stephen Innes, managing partner at SPI Asset Management, warned that U.S. investors need to watch the situation carefully. If "SVB elicited the kind of reaction in the markets it did, CS has a much bigger footprint in global markets; hence I don't think this is something investors could ringfence," Innes said. The bank could be forced to sell down more securities to cover a likely run on large institutional deposits in light of what is going on in broader markets, he said, adding that gold may be looking like a better hedge right now.
Reputation Damage and Financial Stability
Switzerland's reputation for financial stability and a safe haven for assets, crucial for the country's success in wealth and asset management, is already suffering incalculable damage. The failure of Credit Suisse or any losses by deposit holders would destroy Switzerland's reputation as a financial center, said Otavio Marenzi. The Swiss National Bank has declared that Credit Suisse meets the capital and liquidity requirements imposed on system.
Credit Suisse Receives Central Bank Support, U.S. Stock Futures Unsteady
Credit Suisse witnessed a surge in its shares on Thursday as the Swiss bank disclosed that it secured a loan from the Swiss National Bank. Although its bonds also experienced a boost, they have significant ground to make up after investor confidence in the bank took a hit this week.
The announcement from the Swiss bank provided some relief to financial markets in Asia during Thursday's morning trade, which had been experiencing significant selling pressure. This came after tumultuous sessions in both Europe and the United States, as investors grew increasingly concerned about a possible global bank deposit run.
As U.S. stock futures fluctuated, European indexes experienced gains. However, a critical decision is on the horizon, with the European Central Bank set to publish its rate decision at 9:15 E.T. A half-percentage point increase seemed like a certainty until the recent banking turmoil in Europe. Several analysts are now calling for a small increase or no increase at all.
Bottom Line
In conclusion, the meltdown of Credit Suisse is having a ripple effect on U.S. investors and the global banking industry. While the failure of the Swiss bank may not directly impact U.S. investors, it has caused negative sentiment and raised the risk of a global banking crisis. The market turmoil and contagion risk could affect other banks globally, including those in the U.S. Credit Suisse's risky business practices, possible bailout, and the Swiss National Bank's intervention have also raised concerns about the stability of the financial industry. However, Credit Suisse received some central bank support, which provided some relief to the markets in Asia.Let’s see how the market behaves today.
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