Credit Suisse and First Republic are the latest banks in peril. What’s happening? – National
A number of banks around the world are facing significant price falls amid a crisis of confidence spread by the collapse of Silicon Valley Bank.
Credit Suisse’s share price has faltered this week as fears about the future of the Swiss bank were quickly met with a liquidity offer from the Swiss central bank.
In a related case, US-based First Republic Bank received a capital injection from some of its fellow lenders on Thursday amid growing fears it would join SVB and New York’s Signature Bank.
The collapse of the Silicon Valley Bank shook the United States. Now Canada is preparing for aftershocks
Finance officials around the world are moving in lockstep to reassure consumers the global banking environment is safe, as experts say the fear, if left unchecked, could be “catastrophic” for the financial system.
Here’s what you should know.
Credit Suisse on Thursday sought to shore up its liquidity and restore investor confidence by borrowing up to $54 billion from Switzerland’s central bank in what became the first major international bank to become the one since the 2008 financial crisis lifeline was thrown.
Credit Suisse, one of Switzerland’s largest banks, has been in the spotlight for the past few months amid a series of losses and management failures. But that scrutiny was intensified this week when its largest shareholder, the Saudi National Bank, said it would not buy any more shares in the Swiss bank.
That sent Credit Suisse shares down as much as 30 percent this week, hitting a new low. The share price recovered somewhat after it was announced it would accept the central bank’s loan offer.
Credit Suisse borrows up to $54 billion from the Swiss central bank after the stock price crash
Analysts said the latest measures would buy Credit Suisse time to carry out its planned restructuring and possibly take further steps to relieve the Swiss lender.
The Swiss authorities had already declared this week that Credit Suisse “meets the capital and liquidity requirements for systemically important banks”.
Swiss bank Credit Suisse shares fall to record lows
In the United States, the spotlight shifted to First Republic Bank, with several banks including JPMorgan Chase & Co and Morgan Stanley making deposits with the institution to boost confidence in the financial system.
The deal includes a $30 billion capital injection to bolster the troubled lender after SVB’s collapse last week sparked fears of contagion.
“This action by America’s largest banks reflects their confidence in First Republic and in banks of all sizes,” the lenders said in a joint statement.
“The banking system has strong credit, ample liquidity, strong capital and strong profitability. Recent events have not changed that.”
While the stock prices of Canada’s big six banks have all declined over the past five days, each stock was relatively stable in trading on the Toronto Stock Exchange on Thursday.
The recent instability at First Republic Bank and Credit Suisse follows a shock in the US banking sector, with SVB collapsing amid a bank run and Signature Bank, a crypto-friendly lender, collapsing days later.
While the causes of these banking problems may vary, they all serve to fuel “financial market fears,” making the overall operating environment more precarious for other global financial institutions, notes Pedro Antunes, chief economist at the Conference Board of Canada.
“Because they were so different, who knows if there will be more failures in the system,” he tells Global News, adding, “It’s possible we would see another one of those confidence-induced (bank) runs.”
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Antunes says that while most banks, particularly in Canada, are in a pretty good position with stricter regulations than in the 2008 financial crisis, it’s very difficult to protect yourself from a bank run once customers fear your money is at risk.
Ian Lee, a professor at Carleton University who has worked in personal banking for decades, says that if left unchecked, this hysteria poses the ultimate threat to a financial system.
“If you’re afraid of the whole system collapsing, that’s in a whole different category. It’s catastrophic, it’s existential,” he says.
Lee says liquidity fears are a unique threat to the banking system. In a way, he says, all banks are systemically important because if a lender falls, fears of underlying instability erasing consumer deposits can trigger a domino effect that hits the next bank that shows signs of stress.
“That’s what drives the contagion. And then it can spread incredibly quickly from one bank to another — almost like a COVID pandemic, where the virus spreads through the entire population at an incredible rate,” he says.
Policy makers around the world have been scrambling to shed those worries over the past few days in a bid to stabilize sentiment in the banking system.
US Treasury Secretary Janet Yellen told Congress Thursday that the financial system “remains healthy” and Americans can be “safe” about their deposits.
“The administration has taken decisive and vigorous action to increase public confidence in the US banking system,” Yellen said in testimony before the committee.
Collapse of Silicon Valley Bank: Yellen assures Congressional banking system ‘stays strong’
Her comments echo reassurances from Canada’s Treasury Secretary Chrystia Freeland, who said through a spokesman earlier this week that Canadians can be confident the country’s financial institutions are “stable and resilient” and that adequate guard rails are in place.
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But Yellen also conceded to Congress that once a bank run starts, it can overwhelm even the world’s largest institutions.
“No matter how strong capital and liquidity regulation, if a bank has an overwhelming rush, spurred on by social media or whatever, that deposits are fleeing at this rate, banks can be at risk of failing,” she said Thursday.
“One of the reasons we have intervened and declared a systemic risk exception is the recognition that in situations like this, contagion can occur and other banks can then fall prey to the same types of runs, which we are determined to avoid .”
What does this mean for Canada?
Confidence issues in the global banking system are looming as the global economy braces for an economic slowdown, fueled in part by rising interest rates in many countries.
Some market observers had expected the European Central Bank to rein in its telegraphed rate hike on Thursday given the recent uncertainty. But the ECB continued to raise interest rates by 50 basis points in a bid to contain inflation in Europe.
The Federal Reserve faces similar pressures in its decision next Wednesday, with the Bank of Canada’s next rate meeting scheduled for April 12.
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According to Antunes, the uncertainty of the financial system adds another wrinkle to central bank decision-making.
If the global economy slows further amid ongoing banking turmoil, or if consumers and businesses cut spending simply because they fear deeper downturns, it could help slow the pace of inflation more than current forecasts suggest.
“In a way, maybe central banks are looking for it,” says Antunes. “Perhaps we will see central banks loosen up … not hike rates too much going forward.”
Over the past week, money markets have flipped their expectations for the Bank of Canada’s interest rate path and are now pricing in a pre-summer rate cut rather than an additional rate hike.
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Stephen Brown, deputy chief economist for North America at Capital Economics, told Global News in an email on Thursday that he thinks rate cuts that come so early are “very unlikely” given the relatively low risk to deposits if the global banking turmoil winds down not “escalate dramatically”. in Canada compared to the US
He said Capital Economics stands by its call for a moderate recession to hit Canada in 2023, with rate cuts before the end of the year.
Economists at the Bank of Montreal said Thursday in a revised interest rate scenario that the central bank is likely to leave rates unchanged unless the situation at US banks worsens and spreads to Canada.
According to BMO’s Michael Gregory and Jennifer Lee, the ongoing interest rate pause, coupled with lower bond yields driving some fixed-rate mortgages lower, could reignite the housing market and restart economic activity in the coming months.
As a result, BMO expects the Bank of Canada to hold its interest rate steady for the remainder of the year if the economy’s past hikes take hold, with cuts beginning in early 2024.
– with files from Anne Gaviola of Global News, Reuters and The Canadian Press
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