Banking is again under suspicion. The collapse of two regional entities in the United States dealt a first blow to financial institutions around the world last week. The most reassuring news then reiterated that this was a particularly blatant case of mismanagement and that there was no risk of contagion. Now the aftershocks are coming from the heart of Europe, from the ailing Credit Suisse. Its largest shareholder, the Saudi bank SNB, has said it will not provide additional capital if needed.
Without that parachute, the bank is doomed to fly over the financial panic with its own wings, shorter and more fragile than ever after years of scandals, fines, and bad decisions that have weighed on its stock price to a shadow of its former self . Investors are making blood of this weakness this Wednesday: its capitalization is around 7,000 million euros after its shares fell by 24% at the end of the session. And they’re fleeing both the Swiss franc and everything that smells like ATMs and branches: France’s Société Générale and BNP Paribas, and Spain’s Sabadell top 10% decline; Germany’s Commerzbank and Deutsche Bank fell 9%, and America’s JPMorgan, Citigroup and Wells Fargo all collapsed around 5% on a black Wednesday for all banks on both sides of the Atlantic. Spain’s main index, the Ibex 35, fell 4.37%, its biggest drop in 16 months.
The moment for the opening of a new crisis front could not be worse. US authorities are attempting to stabilize the financial system by guaranteeing the deposits of Silicon Valley Bank and Signature Bank customers no matter how much they had and bypassing the $250,000 insurance limit, as doing otherwise would have encouraged contagion . A handful of US regional banks remain under pressure and it is not impossible that the snowball will lead to new victims. The words of US President Joe Biden, who assured that no one will lose their life savings, did nothing to completely stop a vicious cycle of fear and mistrust that is difficult to stop once it has started.
Volatility continues at First Republic Bank, PacWest Bancorp and a few others. On Friday, his demise seemed imminent; On Monday they recovered as if it had all been a passing nightmare and this Tuesday they returned to the red. In any case, the prospects do not seem positive. The Financial Times reports that big banks like JPMorgan and Citigroup are receiving a flood of deposits from small and medium-sized banks. Bad news for those who assumed the firewalls deployed by the Federal Reserve, Treasury Department and regulators would end the problems with the stroke of a pen.
Although the Biden executive appears poised to use all their guns to protect deposits, the most prudent customers are wiring their money to the so-called “too big to fail” — that is, those with one of such systemic importance that it would be unthinkable that they were not bailed out in the turmoil. Will the little ones resist this cash flight? Will there be new regulatory requirements that will reduce loan outstanding? Pimco analysts aren’t optimistic about the knock-on effects to come. “These events may very well lead to a recession,” they warned this Wednesday. Reflecting these renewed fears, the price of a barrel of Brent oil fell 5% and the dollar, a traditional safe haven, gained almost 2% against the euro.
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The seriousness of the matter has reached Lanzarote, where Spanish President Pedro Sánchez has appeared alongside his Portuguese counterpart, António Costa. In talks with the media, he has attempted to erase any parallels to the events of 2008 that led to the Great Recession, now that comparisons to the Lehman Brothers disaster are resurfacing. First, he pointed out that Europe had a reinforced supervisory system that did not exist at the time, and then stressed that both European banks, and especially Spanish banks, have above-average liquidity and solvency ratios. That doesn’t mean, he explained, that you have to get carried away with complacency. “I think there’s a message of calm but also caution and close monitoring of these financial tensions.”
The new plague, Credit Suisse, has been piling up a tale of nonsense in just three years, as long as it’s painful to recount. It was the company hardest hit by the Archegos case, with an estimated loss of $5.3 billion after showing poor risk control by lending exorbitant amounts to an investment firm that lost everything. Tidjane Thiam resigned from his role as CEO in 2020 because he was involved in a spy case, and Portuguese António Horta-Osório left the company’s presidency in January 2021 after an investigation found he had breached pandemic restrictions. It was fined by Brussels for forming a forex cartel with other banks and by the US Securities and Exchange Commission after its employees, like those of other banks, used WhatsApp for business purposes, which was banned because it later was not traceable. And a large-scale leak revealed that he had dictatorship-linked figures, corrupt politicians and members of organized crime as clients. On the same Tuesday, in its 2022 annual report, it acknowledged having identified a “material weakness” in the internal controls over its financial information.
Already last October, doubts about its solvency shot up its default insurance by 2,220 million between restructuring announcements and a capital increase to attract resources. Its managers spent an entire weekend calling investors to try to calm things down. But things have only gotten worse with every result they present: they lost 7,381 million in 2022.
One of the few bits of good news in this bottomless pit the bank dug due to its own mistakes seemed to come in late October when the Saudi National Bank jumped into its capital, buying 9.8% of the shares. New money to bring some order to the chaos. Now he says he will not increase his position any further, making him more vulnerable, and he has once again triggered his default insurance and is waiting to see if the Swiss National Bank will send a public message of support, as requested by the company, according to the Financial Times.
With all this precedent, it’s fair to say his precarious situation comes as a surprise. This is how Arcano economist Leopoldo Torralba explains it. “Like Silicon Valley Bank (SVB), Credit Suisse is another example of a badly run bank. It has made terrible risk decisions in the past and it has nothing to do with the average European bank profile, just as SVB has nothing to do with the average American bank.”
However, the market does not discriminate. Banking is a highly interconnected sector where trust is essential. As such, this Wednesday reported declines in all European and North American entities, regardless of size, risk profile, or their greater or lesser solvency. “We continue to believe it’s normal for this to generate uncertainty due to the memory of the Great Recession and because the rate hike is unknown who else might be affected, but we don’t think it’s anything systemic.” , said Torralba points out.
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