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The banking crisis spreads to Europe.
What you need to know today
- Just when the banking crisis that began with Silicon Valley Bank's collapse looked contained, Credit Suisse destabilized the sector. Its 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.
- Assistance to Credit Suisse, however, will be provided by the Swiss National Bank if necessary, said the Swiss Financial Market Supervisory Authority. Swiss regulators added that Credit Suisse is well capitalized, seeking to assuage fears.
- Markets across Europe fell sharply — Stoxx 600 lost 2.92% — as banking stocks plunged 7%. BNP Paribas slid 10.11%, Societe Generale dropped 12.18% and Deutsche Bank fell 5.17%. Several bank stocks were even temporarily halted from trading during the day because of their steep losses.
- The contagion spread across the Atlantic and infected the U.S. banking sector. Regional banks were 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.
- PROÂ The closures of crypto-friendly banks Silvergate and Signature have, oddly, benefited a crypto asset: stablecoins. "Rather than deposit your dollars with an exchange, you deposit them with a stablecoin issuer," said cryptocurrency analytics firm Kaiko.
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 2021, when it lost billions (and credibility) in the 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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