London () — On a Sunday in March 2008, the US government and bankers rushed to finalize the bailout of Bear Stearns Bank, pushed to the brink of collapse by what amounted to a bank run.
On March 16, 2008, a forced sale was agreed to by JPMorgan Chase for $2 a share, a 93% discount from Bear Stearns’ closing price the previous Friday. (The price was later increased to $10 per share.)
The agreement, carried out under the direction of the Federal Reserve and the US Treasury Department, marked the end of the road for one of the most storied firms on Wall Street. The 85-year-old investment bank was the first domino to fall in the financial crisis that devastated global markets and had dire consequences for the US and European economies.
(A Credit Suisse sign pictured behind a UBS sign in Zurich on March 18, 2023. Fabrice Coffrini/AFP/Getty Images)
Almost exactly 15 years later, in an eerily familiar sequence of events, regulators and bankers in Switzerland scrambled over the weekend to put together a takeover of Credit Suisse, after an emergency loan from the Swiss National Bank failed to reassure clients. and investors.
The buyer was another bigger rival, UBS. The price, 3 billion Swiss francs ($3.25 billion), was about 60% less than what the bank was worth when the markets closed two days earlier. The deal was again made at the behest of regulators.
As the episode caps off Credit Suisse’s 167-year history, it raises new questions about whether this is the start of a broader banking crisis.
“I think the answer is that nobody knows. It doesn’t look very good, but it could still look a lot worse,” said Jonas Goltermann, deputy chief economist at Capital Markets Economics.
Actions by central banks and regulators have restored “a degree of stabilization” but “only time will tell” if that will be enough to stop a broader crisis.
“If we stabilize for a couple of weeks and months, we’ll know the worst is over,” he told on Monday.
Credit Suisse is the first “global systemically important” bank to be bailed out since 2008. The list, which denotes banks whose failure could trigger a global financial crisis, comprises just 30 lenders, including JPMorgan, Bank of America, HSBC, Barclays and Bank of china.
Yet despite its importance to the financial system, most analysts don’t expect Credit Suisse’s demise to usher in another global financial crisis.
The biggest risk, they say, is that stress in the financial system will cause banks to tighten credit. A credit crunch would weigh on households and businesses, increasing the risk of recession. That could lead to increased bad debts and losses for lenders, which their current capital buffers might not be large enough to absorb.
“There is no question that the banking system as a whole is in a better position now than it was 15 years ago,” Goltermann continued. “We have a better damper, but will it be enough?”
central bank firepower
Banks in the US and Europe are in much better financial shape than they were in 2008. Major regulatory reforms since the crisis mean bank balance sheets have strengthened and exposure to risky loans has been significantly reduced.
“It’s not to say that there won’t be more small banks failing… But it’s not a ‘broadcast’ situation like we had in 2008 because supervision is much stronger,” said Annelise Peers, investment director at Investec Bank Switzerland.
Not only is there less anxiety about the stability of banks, but there is also greater confidence in the powers of regulators to contain a broader crisis.
Building on the experience gained from previous crises, including the coronavirus pandemic, central banks have developed a number of tools to provide financing to markets quickly if necessary.
On Sunday, the Federal Reserve, the European Central Bank, the Bank of England and the central banks of Canada, Japan and Switzerland agreed to make an emergency supply of dollars available until at least the end of April to avoid running out of liquidity.
This coordinated action indicates how seriously they are taking the risk of broader contagion.
In a sign of the relative health of their balance sheets, European banks showed limited appetite for the emergency facility on Monday.
While many smaller US banks have taken advantage of a new Fed lending program, established after Silicon Valley Bank collapsed on March 10, none have borrowed on terms that suggest they are on the verge of bankruptcy.
trust is crucial
But capital and regulation are not enough. Banks also depend on customer and investor perceptions of them. Credit Suisse’s healthy capital and liquidity ratios did not save it once confidence evaporated.
Central banks and governments would struggle to calm markets in the face of a widespread collapse in confidence that prompts more bank stampedes like those that hit Credit Suisse, Silicon Valley Bank and Signature Bank. That is why regulators are acting so forcefully to increase confidence in banks.
“Banking has to do with trust; that can evaporate at any time and I think that [crea] big nerves,” said Rupert Silver, head of Fixed Income at Credo Group, a UK-based wealth manager.
There is “significantly more risk” among regional US banks, which are subject to lighter regulation than large lenders, he added. “I’m much less concerned about Europe and the UK…the banks are dramatically well capitalized [y] the vast majority are making more money than ever before.
Shares of First Republic, a regional US bank, closed 47% lower on Monday, even as stock markets posted gains on investor optimism that regulators have contained the worst of the crisis. .
Beware of the credit crunch
The problems at First Republic and other regional US banks serve as a cautionary reminder that a sharp rise in interest rates since last year also poses a risk to banks other than the SVB.
“While it’s tempting to dismiss the problems at SVB, Signature Bank and Credit Suisse as idiosyncratic, they have revealed that trouble is lurking in the financial system as interest rates rise,” said Neil Shearing, group chief economist at Capital Economics.
“Key areas to monitor include smaller European banks and shadow banks,” Shearing added.
“Shadow banks”, or non-bank financial institutions, refer to specialized lenders that fall outside of the traditional banking sector. These may include mortgage and vehicle finance companies, as well as some hedge funds, private credit funds, and money market funds.
On the one hand, the rise in interest rates has made lending more lucrative for banks, which has helped raise the aggregate profitability of the banking sector in the European Union to its highest level since 2014.
But, on the other hand, the increase in rates has affected the value of some of the banks’ assets, including government bonds. Meanwhile, weaker economic growth and rising borrowing costs are making it harder for its clients to repay loans.
The risk is that the banks, which have already tightened credit and increased provisions for bad debts, take an even more cautious approach to lending in response to recent market turmoil. That would hurt consumer demand and business investment and could trigger an economic downturn.
“If banks are under pressure, they may be reluctant to lend,” US Treasury Secretary Janet Yellen said last week in testimony before the Senate Finance Committee. “We could see credit become more expensive and less available.”
In comments due later Tuesday, he will also say the US federal government may have to come to the rescue of uninsured bank depositors once again if smaller lenders suffer bank runs like the one that brought down SVB. .
Shearing sees a greater danger. “A vicious cycle is likely to develop, with credit tightening, the real economy deteriorating and delinquency rates starting to rise,” he said. That would be a “much more serious crisis.”
— Matt Egan contributed to this report.
