New fears for the stability of the global financial system rattled financial markets on Wednesday, after Credit Suisse acknowledged it found ‘material weakness’ in its financial reporting, adding uncertainty to the already jittery banking sector in the wake of Silicon Valley Bank’s collapse.
NEW FEARS for the stability of the global financial system rattled financial markets on Wednesday, after Credit Suisse acknowledged it found “material weakness” in its financial reporting, adding uncertainty to the already jittery banking sector in the wake of Silicon Valley Bank’s collapse.
Shares of Credit Suisse were down 20 percent on the news. The Dow Jones industrial average was down 1.7 percent, and the tech-heavy Nasdaq was also down more than 1 percent, reversing gains made Tuesday. European banking stocks also tumbled, dragging down the major indexes; the Pan-European Stoxx 600 index slid more than 2 percent.
Compounding matters, the bank’s largest investor signalled on Wednesday that it would not be rushing in with more cash to help buttress the firm.
Credit Suisse has had long-running problems that “do not come as a complete shock to either investors or policymakers,” Andrew Kenningham, chief Europe economist with Capital Economics, said in a research note Wednesday. But the bank has a much larger balance sheet than SVB and is much more intertwined with the global financial system, with many subsidiaries outside Switzerland, he said.
“Credit Suisse is not just a Swiss problem but a global one,” Kenningham said. The sell-off in the bank’s shares may have implications on the European Central Bank’s decision, due Thursday, about raising rates, he added.
If the Swiss bank was “to enter a really disorderly phase, that would be a big event,” said French economist Nicolas Véron, a senior fellow at Bruegel and the Peterson Institute for International Economics. “Having said that, it was already perceived as troubled for some time. I expect that fact to have been factored into the strategies of market participants. So I imagine the risk won’t be borne by well-regulated institutions.”
“The ECB had been more attentive to this kind of risk than the Fed,” Véron added. “The kind of risk we’ve seen with Silicon Valley Bank has been high on the obsession list of the ECB for the past few years.”
The US economy appeared to be on strong footing in recent months, with the labour market remaining strong and inflation showing signs that it had begun to cool. But that all changed Friday, when Silicon Valley Bank suddenly failed, marking the second-biggest bank failure in US history.
Financial stocks have been shaky ever sense, and regulators shuttered Signature Bank on Sunday. To stave off a broader panic, US authorities stepped in to assure depositors they would be made whole. Regional bank stocks fell sharply on Monday and then rebounded on Tuesday. But the Credit Suisse news on Wednesday, a sign that banking sector issues aren’t confined to US banks, appears to have rattled investors in banks again.
Shares of First Republic Bank, another Bay Area bank catering to tech clients, dropped more than 16 percent and shares of Phoenix-based Western Alliance dropped 6 percent. Volatility spread across the market – the CBOE VIX index, known as Wall Street’s “fear gauge,” was up more than 12 percent.
The White House scrambled this weekend to calm customers and the banking industry, moving swiftly to avert a sense of crisis. In Silicon Valley, start-up founders who kept their money at Silicon Valley Bank fretted over how they would pay their employees before breathing a sigh of relief when they learned they’d have access to their full accounts.
But SVB and Signature’s closures still sent a sense of precariousness through the banking sector. When Credit Suisse issued its annual report that found that its “disclosure controls and procedures were not effective” during a certain time period, it was into a market that was already on-edge.
Credit Suisse had delayed releasing its annual report after the Securities and Exchange Commission asked for more information last week about past cash flow statements. In its annual report, eventually released Tuesday, the bank said it discovered “material weaknesses in internal control over financial reporting” in 2021 and 2022.
Credit Suisse’s largest investor, Saudi National Bank, said it would not take a larger stake in the company.
“The answer is absolutely not, for many reasons outside the simplest reason, which is regulatory and statutory,” chairman Ammar Al Khudairy told Bloomberg TV.
Credit Suisse is in the midst of a big restructuring in an attempt to make the bank profitable again.
Banking stocks had rebounded Tuesday before Wednesday’s early sell-off took hold.
– THE WASHINGTON POST