Interactive Investor

Is Credit Suisse crisis another ‘one-off’ or will there be more shocks?

15th March 2023 15:34

by Graeme Evans from interactive investor

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The more they happen, the harder it is to keep brushing off major market moving events. So are the woes of this major global bank just the tip of the iceberg?

Credit Suisse in Zurich 600

Stock market turmoil today focused on worries that the crisis at Credit Suisse Group AG (SIX:CSGN) and the collapse of SVB Financial Group (NASDAQ:SIVB) can’t just be written off as “idiosyncratic” events.

Capital Economics pointed out today: “This is the third “one-off” problem in a few months, following the UK’s gilt market crisis in September and the US regional bank failures last week, so it would be foolish to assume there will be no other problems coming down the road.”

London-listed banks survived the storm over SVB because they have more diversified deposit bases than those of regional and technology-concentrated US lenders.

The plight of struggling Credit Suisse is a much bigger concern altogether, given the scale of its balance sheet and the potential for contagion from the bank’s global reach.

The bank’s share price plunged 30% to a record low today after its biggest shareholder Saudi National Bank, which owns almost 10% of the business, said it could not provide further support to the group, which last week disclosed ‘material weakness’ in its financial statements just weeks after reporting a net loss of £6.6 billion in 2022.

The bank’s chairman sought to calm market fears today, but five-year credit default swaps, which gauge the cost of insuring against Credit Suisse’s bonds, still soared to a record high.

As a Global Systemically Important Bank it will have a resolution plan in place, but the implementation of such living wills has yet to be tested since the financial crisis.

Capital Economics added: “The problems in Credit Suisse once more raise the question whether this is the beginning of a global crisis or just another “idiosyncratic” case.

“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.”

The developments of the past week also fuel fears about the lag effect of higher interest rates following last year’s rapid tightening of monetary policy on both sides of the Atlantic.

Deutsche Bank strategist Jim Reid said today in relation to Silicon Valley Bank: “We should probably view this whole episode as evidence that the tightening cycle is having an impact with the usual lag and that events are unlikely to stop here.”

The focus now turns to tomorrow’s European Central Bank meeting and whether policymakers stick with their pre-announced plan to raise the deposit rate from 2.5% to 3%, or put the rise on hold in order to see how events develop.

Traders are also revisiting their bets on next week’s meeting of the Federal Reserve, with an increased chance that policymakers may now shelve a planned rate rise.

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