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The banking crisis spreads to Europe.
What you need to know today
- Credit Suisse announced it will be borrowing up to 50 billion Swiss francs ($53.68 billion) from the Swiss National Bank just hours after the country's central bank offered Credit Suisse a loan to shore up its liquidity.
- Yesterday showed that the banking crisis that began with Silicon Valley Bank's collapse wasn't as contained as many had thought. Credit Suisse's shares tanked 24.24% after its largest investor, Saudi National Bank, said it couldn't provide the Swiss bank with further financial assistance due to regulations.
- Even though investors were spooked, Ammar Al Khudairy, chairman of Saudi National Bank, seemed unfazed. He told CNBC's Hadley Gamble the turmoil in banking is "isolated" and the panic is "completely unwarranted."
- Following European banks' dramatic declines yesterday, fear leaped across the Atlantic and infected the U.S. banking sector. Regional banks got hammered again. PacWest Bancorp lost 12.87%. First Republic Bank plunged 21.37%; its debt rating was downgraded by S&P Global Ratings and Fitch. Large banks were not unscathed. JPMorgan Chase fell 4.72%, Citigroup slid 5.44% and Goldman Sachs dropped 3.09%.
- The Dow Jones Industrial Average lost 0.9% and the S&P 500 fell 0.7%. The Nasdaq Composite posted a small gain of 0.05% — technology stocks, such as Netflix (which gained 3%) and Alphabet (which was up 2.28%) managed to avoid the banking downturn.
- Asia-Pacific markets were battered on Thursday. Banks in South Korea and Australia saw steep drops, but regained ground after Credit Suisse announced it would be borrowing money from the Swiss National Bank.
- PROÂ An indicator for the risk of default is surging for Credit Suisse and other European banks. The reading for Credit Suisse is so high that it was only seen during the 2008 financial meltdown.
The bottom line
The banking turmoil in the U.S. — which appeared to be contained just yesterday — spread to Europe on Wednesday in the form of Credit Suisse.
It's important, however, to note that Credit Suisse's troubles are unrelated to reasons behind SVB's implosion. On Tuesday, Credit Suisse acknowledged "material weakness" in its financial reporting processes for 2022 and 2021. But the Swiss bank's problems really began in 2020 with a spying scandal, followed by a loss of billions (and credibility) in the 2021 Archegos hedge fund scandal — which eventually led to a dramatic restructuring late last year.
Though unrelated, the combination of banking crises in the U.S. and Europe could make money much harder to come by, according to Peter Boockvar of Bleakley Financial Group. Banks, Boockvar said on CNBC's "Squawk Box," are going to "focus more on firming up balance sheets" than on lending.
And a slowdown in lending would cut into demand and capital investment, which, in turn, could make a recession arrive sooner. Indeed, yesterday, bond yields, oil and markets all fell. "What you're really seeing is a significant tightening of financial conditions. What the markets are saying is this increases risks of a recession," said Jim Caron, head of macro strategy for global fixed income at Morgan Stanley Investment Management. Echoing that view, Goldman Sachs on Wednesday lowered its growth forecast for the U.S. by 0.3 percentage points to 1.2%.
That scenario is not all that surprising. Tightening financial conditions and a slowdown in the economy are exactly what the Federal Reserve is hoping to engineer through its interest rate hikes. The renewed volatility in the banking sector — along with a drop in February's wholesale prices and retail sales — has increased the chance, then, that the Fed might hold the line at its next meeting. It's a common saying that interest rates work at a lag — first gradually, then suddenly. We might be seeing the effects now of rapid rate hikes from last year.
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