Tag: financial crisis

Credit Suisse to borrow almost $54 billion from central bank after shares plunge

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Swiss bank Credit Suisse said Thursday it will move to shore up its finances, borrowing up to $54 billion from the central bank after its shares plunged, dragging down other major European lenders in the wake of bank failures in the United States.

Credit Suisse said would exercise an option to borrow up to 50 billion francs ($53.7 billion) from the central bank.

“This additional liquidity would support Credit Suisse’s core businesses and clients as Credit Suisse takes the necessary steps to create a simpler and more focused bank built around client needs,” the bank said.

Fanning new fears about the health of financial institutions following the recent collapse of Silicon Valley Bank and Signature Bank in the US, at one point, Credit Suisse shares lost more than a quarter of their value on Wednesday.

The share price hit a record low after the bank’s biggest shareholder — the Saudi National Bank — told news outlets that it would not put more money into the Swiss lender, which was beset by problems long before the US banks collapsed. The Saudi bank is seeking to avoid regulations that kick in with a stake above 10%, having invested some 1.5 billion Swiss francs to acquire a holding just under that threshold.

The turmoil prompted an automatic pause in trading of Credit Suisse shares on the Swiss market and sent shares of other European banks tumbling, some by double digits.

Speaking Wednesday at a financial conference in the Saudi capital of Riyadh, Credit Suisse Chairman Axel Lehmann defended the bank, saying, “We already took the medicine” to reduce risks.

When asked if he would rule out government assistance in the future, he said: “That’s not a topic. … We are regulated. We have strong capital ratios, very strong balance sheet. We are all hands on deck, so that’s not a topic whatsoever.”

Switzerland’s central bank announced late Wednesday that it was prepared to act, saying it would support Credit Suisse if needed. A statement from the bank did not specify whether the support would come in the form of cash or loans or other assistance. The regulators said they believed the bank had enough money to meet its obligations.

A day earlier, Credit Suisse reported that managers had identified “material weaknesses” in the bank’s internal controls on financial reporting as of the end of last year. That fanned new doubts about the bank’s ability to weather the storm.

Credit Suisse stock dropped about 30%, to about 1.6 Swiss francs ($1.73), before clawing back to a 24% loss at 1.70 francs ($1.83) at the close of trading on the SIX stock exchange. At its lowest, the price was down more than 85% from February 2021.

After the joint announcement from the Swiss National Bank and the Swiss financial markets regulator, the shares also made up some ground on Wall Street.

The stock has suffered a long, sustained decline: In 2007, the bank’s shares traded at more than 80 francs ($86.71) each.

With concerns about the possibility of more hidden trouble in the banking system, investors were quick to sell bank stocks.

France’s Societe Generale SA dropped 12% at one point. France’s BNP Paribas fell more than 10%. Germany’s Deutsche Bank tumbled 8%, and Britain’s Barclays Bank was down nearly 8%. Trading in the two French banks was briefly suspended.

The STOXX Banks index of 21 leading European lenders sagged 8.4% following relative calm in the markets Tuesday.

Shares in US markets were mixed on Wednesday, with the Nasdaq composite edging 0.1% higher while the S&P 500 dropped 0.7%. The Dow Jones Industrial Average ended 0.9% lower after logging bigger losses early in the session.

Japanese banks resumed their downtrend, with Resona Holdings, the nation’s No. 5 bank, falling 5% while other major banks fell more than 3%.

The turbulence came a day ahead of a meeting by the European Central Bank. President Christine Lagarde said last week, before the US failures, that the bank would “very likely” increase interest rates by a half percentage point to fight against inflation. Markets were watching closely to see if the bank carries through despite the latest turmoil.

Credit Suisse is “a much bigger concern for the global economy” than the midsize US banks that collapsed, said Andrew Kenningham, chief Europe economist for Capital Economics.

It has multiple subsidiaries outside Switzerland and handles trading for hedge funds.

“Credit Suisse is not just a Swiss problem but a global one,” he said.

He noted, however, that the bank’s “problems were well known so do not come as a complete shock to either investors or policymakers.”

The troubles “once more raise the question about whether this is the beginning of a global crisis or just another ‘idiosyncratic’ case,” Kenningham said in a note. ”Credit Suisse was widely seen as the weakest link among Europe’s large banks, but it is not the only bank which has struggled with weak profitability in recent years.”

Leaving a Credit Suisse branch in Geneva, Fady Rachid said he and his wife are worried about the bank’s health. He planned to transfer some money to UBS.

“I find it hard to believe that Credit Suisse is going to be able to get rid of these problems and get through it,” said Rachid, a 56-year-old doctor.

Investors responded to “a broader structural problem” in banking following a long period of low interest rates and “very, very loose monetary policy,” said Sascha Steffen, professor of finance at the Frankfurt School of Finance & Management.

In order to earn some yield, banks “needed to take more risks, and some banks did this more prudently than others.”

European finance ministers said this week that their banking system has no direct exposure to the US bank failures.

Europe strengthened its banking safeguards after the global financial crisis that followed the collapse of US investment bank Lehman Brothers in 2008 by transferring supervision of the biggest banks to the central bank, analysts said.

The Credit Suisse parent bank is not part of EU supervision, but it has entities in several European countries that are. Credit Suisse is subject to international rules requiring it to maintain financial buffers against losses as one of 30 so-called globally systemically important banks, or G-SIBs.

The Swiss bank has been pushing to raise money from investors and roll out a new strategy to overcome an array of troubles, including bad bets on hedge funds, repeated shake-ups of its top management and a spying scandal involving Zurich rival UBS.

In an annual report released Tuesday, Credit Suisse said customer deposits fell 41%, or by 159.6 billion francs ($172.1 billion), at the end of last year compared with a year earlier.

(AP)

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US government takes steps to prevent potential banking crisis

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The US government took extraordinary steps Sunday to stop a potential banking crisis after the historic failure of Silicon Valley Bank, assuring all depositors at the failed institution that they could access all their money quickly, even as another major bank was shut down.

The announcement came amid fears that the factors that caused the Santa Clara, California-based bank to fail could spread.

Regulators had worked all weekend to try to find a buyer for the bank, which was the second-largest bank failure in history. Those efforts appeared to have failed Sunday.

In a sign of how fast the financial bleeding was occurring, regulators announced that New York-based Signature Bank had also failed and was being seized on Sunday. At more than $110 billion in assets, Signature Bank is the third-largest bank failure in US history.

The near-financial crisis that US regulators had to intervene to prevent left Asian markets jittery as trading began Monday. Japan’s benchmark Nikkei 225 slipped about 1.2% in morning trading. Australia’s S&P/ASX 200 shed 0.6% to 7,104.30. South Korea’s Kospi, though, was little changed.

In an effort to shore up confidence in the banking system, the Treasury Department, Federal Reserve and FDIC said Sunday that all Silicon Valley Bank clients would be protected and able to access their money. They also announced steps that are intended to protect the bank’s customers and prevent additional bank runs.

“This step will ensure that the US banking system continues to perform its vital roles of protecting deposits and providing access to credit to households and businesses in a manner that promotes strong and sustainable economic growth,” the agencies said in a joint statement.

Under the plan, depositors at Silicon Valley Bank and Signature Bank, including those whose holdings exceed the $250,000 insurance limit, will be able to access their money on Monday.

In a separate move, the Federal Reserve late Sunday announced an expansive emergency lending program that’s intended to prevent a wave of bank runs that would threaten the stability of the banking system and the economy as a whole.

Fed officials characterised the program as akin to what central banks have done for many decades: Lend freely to the banking system so that customers would be confident that they could access their accounts whenever needed.

The lending facility will allow banks that need to raise cash to pay depositors to borrow that money from the Fed, rather than having to sell Treasuries and other securities to raise the money.

Silicon Valley Bank had been forced to dump some of its Treasuries at at a loss to fund its customers’ withdrawals. Under the Fed’s new program, banks can post those securities as collateral and borrow from the emergency facility.

The Treasury has set aside $25 billion to offset any losses incurred under the Fed’s emergency lending facility. Fed officials said, however, that they do not expect to have to use any of that money, given that the securities posted as collateral have a very low risk of default.

Analysts said the Fed’s program should be enough to calm financial markets on Monday.

“Monday will surely be a stressful day for many in the regional banking sector, but today’s action dramatically reduces the risk of further contagion,” economists at Jefferies, an investment bank, said in a research note.

Though Sunday’s steps marked the most extensive government intervention in the banking system since the 2008 financial crisis, its actions are relatively limited compared with what was done 15 years ago. The two failed banks themselves have not been rescued, and taxpayer money has not been provided to the banks.

President Joe Biden said Sunday evening as he boarded Air Force One back to Washington that he would speak about the bank situation on Monday. In a statement, Biden also said he was “firmly committed to holding those responsible for this mess fully accountable and to continuing our efforts to strengthen oversight and regulation of larger banks so that we are not in this position again.”

Regulators had to rush to close Silicon Valley Bank, a financial institution with more than $200 billion in assets, on Friday when it experienced a traditional run on the bank where depositors rushed to withdraw their funds all at once. It is the second-largest bank failure in US history, behind only the 2008 failure of Washington Mutual.

Some prominent Silicon Valley executives feared that if Washington didn’t rescue the failed bank, customers would make runs on other financial institutions in the coming days. Stock prices plunged over the last few days at other banks that cater to technology companies, including First Republic Bank and PacWest Bank.

Among the bank’s customers are a range of companies from California’s wine industry, where many wineries rely on Silicon Valley Bank for loans, and technology startups devoted to combating climate change.

Sunrun, which sells and leases solar energy systems, had less than $80 million of cash deposits with Silicon Valley. Stitchfix, the popular clothing retail website, disclosed in a recent quarterly report that it had a credit line of up to $100 million with Silicon Valley Bank and other lenders.

Tiffany Dufu, founder and CEO of The Cru, a New York-based career coaching platform and community for women, posted a video Sunday on LinkedIn from an airport bathroom, saying the bank crisis was testing her resiliency.

Given that her money was tied up at Silicon Valley Bank, she had to pay her employees out of her personal bank account. With two teenagers to support who will be heading to college, she said she was relieved to hear that the government’s intent is to make depositors whole.

“Small businesses and early-stage startups don’t have a lot of access to leverage in a situation like this, and we’re often in a very vulnerable position, particularly when we have to fight so hard to get the wires into your bank account to begin with, particularly for me, as a Black female founder,” Dufu told The Associated Press.

Silicon Valley Bank began its slide into insolvency when its customers, largely technology companies that needed cash as they struggled to get financing, started withdrawing their deposits. The bank had to sell bonds at a loss to cover the withdrawals, leading to the largest failure of a US financial institution since the height of the financial crisis.

Yellen described rising interest rates, which have been increased by the Federal Reserve to combat inflation, as the core problem for Silicon Valley Bank. Many of its assets, such as bonds or mortgage-backed securities, lost market value as rates climbed.

Sheila Bair, who was chairwoman of the FDIC chair during the 2008 financial crisis, recalled that with almost all the bank failures during that time, “we sold a failed bank to a healthy bank. And usually, the healthy acquirer would also cover the uninsured because they wanted the franchise value of those large depositors so optimally, that’s the best outcome.”

But with Silicon Valley Bank, she told NBC’s “Meet the Press,” “this was a liquidity failure, it was a bank run, so they didn’t have time to prepare to market the bank. So they’re having to do that now, and playing catch-up.”

(AP)

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