Bank fears go global, rattle markets
Fear about the unseen risks to the financial system rippled across the world Wednesday, breaking the brief calm that had settled over markets and deepening worries that a banking crisis could threaten the economy.
The turmoil was set off by a panic over the health of Credit Suisse, the 166-year-old Swiss bank that has been reeling from years of mismanagement and poor risk control and that warned this week about problems in its accounting practices.
Although the Swiss bank’s difficulties differ from the woes of the US banks that have collapsed in recent days, concern about Credit Suisse added to a sense of dread about the economy in general.
In an attempt to calm investors’ nerves, Switzerland’s central bank, Swiss National Bank, said late in the day that it would step in if necessary to keep Credit Suisse afloat.
Several hours later, the troubled lender said it would borrow up to 50 billion Swiss francs (US$54 billion) from the central bank to ward off concerns about its financial health.
The S&P 500 ended with a decline of just 0.7% after recovering from a larger fall earlier in the day, but trading in bond and commodities markets signalled that investors were worried about the economy.
Global oil prices slid to their lowest levels in more than a year, while yields on US government bonds also lurched downward.
“This is morphing into a bigger deal,” Priya Misra, head of global rates strategy at TD Securities, said, explaining the drastic moves in markets Wednesday.
“If this is not resolved quickly, we should talk about a deep recession as the base case — nobody was talking about a deep recession before.”
The moves dumbfounded some investors, who consider the economies in the United States and elsewhere as more solid than the turmoil suggests.
They attributed the chaotic trading to the fact that investors were worried that it might be difficult to spot risks lurking after an unusually fast increase in interest rates over the past year.
The moves also highlighted the fragility of the financial markets when investors lose their grasp of what could happen next.
This year was already going to be an unpredictable one for the economy and the markets, coming after a tumultuous 2022, but “that uncertainty has only gone higher”, said Dan Ivascyn, the chief investment officer of Pimco, the bondfund manager with roughly $2 trillion in assets.
Wall Street has been on edge ever since the collapse of Silicon Valley Bank and Signature Bank, which were seized by regulators after suffering devastating runs on deposits.
Policymakers have sought to contain the risks by backstopping lenders, and although those efforts have helped ease concerns, Wednesday’s trading showed that the anxiety isn’t fully resolved.
Credit Suisse’s shares plunged to a new low after the bank’s largest shareholder, Saudi National Bank, ruled out providing it more money as it struggles with its latest turnaround plan.
The Swiss National Bank said it stood ready to support Credit Suisse if necessary, but not before shares across Europe were also hard hit, with stocks of many of the region’s biggest banks falling sharply.
Rating agencies have noted that the European banks have less exposure to the same risks that took down small lenders in the United States, while investors took some comfort from the swift action taken by authorities around the world.
“We think there is a reasonable chance you see some stabilisation,” said Mr Ivascyn.
“But there are going to be aftershocks. We think we are in a volatile environment for the next several months.”
Shortly before the markets opened in the United States, S&P Global Ratings cut the credit rating of First Republic Bank, another US lender that investors are worried about, into so-called junk territory.
The agency said that the risk of deposit withdrawals was “elevated”, noting that the bank’s $176 billion deposit base is more concentrated than many other banks, with a large share commercial clients holding balances above the $250,000 limit insured by the government.
First Republic Bank skidded 21% Wednesday and PacWest Bancorp, another bank whose shares have recently come under pressure, fell 13%, with the volatility triggering temporary halts in trading at various points during the day.