Tags : Banking, bankrupt, Crédit Suisse, American Banks, SVB,
Two bankrupt American banks, Credit Suisse neglected by its customers and its shareholders: it was enough to awaken the memory of the financial crisis of 2008. And to recall the essential role of central banks…
By Dominique Berns
Journalist in the Economy department
The American banking problems which are rapidly contaminating Europe, public authorities which ensure that the situation is under control, then intervene massively: the events which have shaken up the banking world on both sides of the Atlantic over the past ten days have awakened the bad memories of the great financial crisis of 2008. Wrongly, let’s hope. But the proof has been made once again that financial stability essentially depends on the guarantee of central banks, and therefore of States.
It all started, this time again, in the United States, where, ten days ago, the American authorities discovered two « bad apples » – the Bank of Silicon Valley (SVB) and Signature Bank – that they were obliged to to close, after a bank run , a « rush on the counters », which resulted in a massive flight of depositors.
The public authorities ensure that the fall of these two banks – recorded for the first on the eve of last weekend and for the second, last Sunday – is primarily due to poor internal risk management; and, above all, that the problem is confined to a particular segment of the American banking sector, which, like SVB and Signature, mainly has tech or health start-ups as clients.
Nevertheless: the central bank of the United States, the Federal Reserve indeed fears the contagion since it opens, as of last Sunday, a new counter intended for all the American banks which would face massive withdrawals. And the American State, via the Deposit Protection Fund (FDIC), guarantees all the deposits of the customers of these two banks, beyond the legal ceiling of 250,000 dollars, thus circumventing the rules of the game. A decision which aims to preserve the tech sector, already weakened, but which, at the same time, also “saves” wealthy entrepreneurs from Silicon Valley.
The cost of the operation, says Washington, will be absorbed by a special levy on the banking sector. No more, says President Biden that taxpayers will be put to work again – especially when the Federal Reserve’s interest rate hike, justified by the fight against inflation, will put millions of ordinary Americans out of work .
A replica in Zurich?
On this side of the Atlantic, the authorities are reassuring: European banks are solid, we are told. None of them has the same profile as SVB and Signature – probably a blessing in disguise, the population of start-ups being smaller here – and the exposure of the European banking sector to these two banks – understand: the potential losses that their bankruptcy could cause – is practically non-existent.
Then boom! Barely have the stock markets had time, at the beginning of last week, to digest these American upheavals, Europe, in turn, is affected. On Wednesday, Credit Suisse, which is among the thirty institutions considered “systemic” globally (read: too big to fail), plummeted on the Zurich Stock Exchange.
At issue: statements by its main shareholder, the Saudi National Bank (SNB), which holds 9.8% of the shares since a capital increase of 4 billion Swiss francs carried out last November. Asked by Bloomberg TV, the president of SNB replied that his institution, which is the first bank in Saudi Arabia, would not return to the pot, while specifying that he did not think that the Swiss bank needed additional capital.
On the European stock exchanges, participants would then sell massively the shares of other European banks whose excellent 2022 results they had recently celebrated.
The spectacular fall in the stock market is only the symptom of a crisis that has been going on for two years at Credit Suisse: deserted by many clients after a succession of scandals, the institution recorded, for the 2022 financial year, a loss net of 7.3 billion francs (nearly 7.4 billion euros) – the largest in its history. And the restructuring plan being implemented is struggling to convince many shareholders, in particular the American investment company Harris Associates – for a long time the largest shareholder – which recently revealed that it had completely sold its stake.
Publicly, the president of Credit Suisse ensures Wednesday that the bank is solid and does not need a support of the State… that the direction of the bank negotiates behind the scenes with the authorities. And that it obtains the same evening, not in the form of a bailout, but of a line of credit from the Swiss National Bank, the Swiss central bank, up to 50 billion francs. In Zurich, we don’t count when it comes to saving the country’s second largest bank and protecting the reputation of the Swiss financial centre/tax haven.
However, the central bank’s line of credit essentially buys Credit Suisse time and will not solve the bank’s structural problems – and this is why speculation was rife at the end of last week on a possible recovery of the bank perhaps by the other Swiss giant UBS, as reported by the Financial Times, while the title relapsed on Friday afternoon.
Mistrust persists
There is no direct link between the bankruptcy of the two American banks and the setbacks of the Swiss bank. However, in Switzerland as in the United States, the intervention of the authorities – and, in particular, of the central bank, which, controlling the « printing money », the only institution authorized to create legal currency – aims to calm turbulence and avert the risk of contagion to other institutions.
Contagion can take direct channels. This was the case in 2008, when it was discovered that many banks, in the United States and in Europe, were exposed to American “subprime” mortgage loans granted to borrowers with low repayment capacity. We are not aware today of the existence of such a “virus”, as the economist Eric Dor explains opposite.
But the contagion can also catch up with other institutions by the band. Last week, in the United States, regional banks thus saw part of their customers transfer their funds to national banks, considered to be, if not safer, in any case too big for the State to let go bankrupt.
Despite the Federal Reserve’s promise to offer them as much cash as they need and Friday’s deposit by the ten largest U.S. banks and financial institutions, including JPMorgan Chase, Bank of America, Citigroup and Wells Fargo, of $30 billion with the Californian bank First Republic, which was visibly in the front line, mistrust persisted on the eve of the weekend. And, in the best-case scenario, it will probably take some time for the concerns to dissipate.
A pause in monetary tightening?
And there is a good reason. The current context of rapid interest rate hikes, orchestrated by central banks on the grounds of curbing inflation, is good but also bad for banks. On the face side, the interest margin increases; on the tails side, they must better remunerate their clients’ deposits, while their assets yield little, with regard to the loans granted when the rates were low, or lose value, with regard to the sovereign bonds that they hold.
For SVB, the scales clearly tipped in the wrong direction. Other banks will undoubtedly experience difficult times without necessarily sinking, in the United States and in Europe – even if, overall, « the banking sector in the euro zone is resilient », as the President of the Central Bank has repeated. European (ECB), Christine Lagarde Thursday.
On this basis, the ECB has decided to raise its key interest rates by 50 basis points, as announced six weeks ago. The ECB does not have to compromise between price stability and financial stability, explained Christine Lagarde, while refusing to commit to further monetary tightening in the future.
We will see next week if the Federal Reserve and the Bank of England adopt the same line or decide to put the rate hike on hold – just to settle the dust and see more clearly on the real situation of the banks.
Le Soir (Belgium)
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