A number of banks around the world are facing significant stock hits amid a crisis of confidence spreading from the collapse of Silicon Valley Bank.
Credit Suisse’s share price has whipsawed this week as fears about the Swiss bank’s future were swiftly met with an offer of liquidity from Switzerland’s central bank.
In a similar case on Thursday, First Republic Bank in the U.S. was given a capital injection from some of its fellow lenders amid growing fears it would join SVB and New York-based Signature Bank in going under.
Financial officials across the world are moving in lock-step to reassure consumers that the global banking environment is secure, as experts say that fear, if left unchecked, could be “catastrophic” for the financial system.
Here’s what to know.
Credit Suisse sought to shore up its liquidity and restore investor confidence on Thursday by borrowing up to US$54 billion from Switzerland’s central bank, marking the first major international bank to be thrown a lifeline since the 2008 financial crisis.
Credit Suisse, one of Switzerland’s largest banks, has already been in the spotlight over recent months amid a string of losses and management failures. But that scrutiny intensified this week when its largest shareholder, the Saudi National Bank, said it would not buy up more of the Swiss bank’s shares.
That sent Credit Suisse’s stock cratering by as much as 30 per cent this week, hitting a new low. The stock price recovered somewhat amid news it would accept the credit offer from the central bank.
Analysts said the latest measures will buy time for Credit Suisse to carry out its planned restructuring and possibly take further steps to pare back the Swiss lender.
Swiss authorities had already said this week that Credit Suisse met “the capital and liquidity requirements imposed on systemically important banks.”
Swiss bank Credit Suisse shares plummet to record low
In the United States, the spotlight moved to First Republic Bank, with several banks including JPMorgan Chase & Co and Morgan Stanley making deposits in the institution to shore up confidence in the financial system.
The deal involves a capital infusion of US$30 billion to bolster the troubled lender after the collapse of SVB last week triggered fears of a 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, plenty of liquidity, strong capital and strong profitability. Recent events did nothing to change this.”
In Canada, while the big six banks all have seen their share prices edge lower over the past five days, each stock held relatively steady Thursday in trading on the Toronto Stock Exchange.
Why is this happening now?
The latest instability at First Republic Bank and Credit Suisse follows a shakeup in the U.S. banking sector that saw SVB collapse amid a bank run and Signature Bank, a crypto-friendly lender, fold a few days later.
While the causes for these banking woes might be distinct, they all serve to raise “financial market jitters,” which makes the general 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’s going to be more failures in the system,” he tells Global News, adding, “it’s possible that we would see another one of these confidence-induced (bank) runs.”
Antunes says that while most banks, especially in Canada, are in a fairly good position with more robust regulations than in the 2008 financial crisis, it’s very difficult to protect from a bank run once customers have it in their minds that their money is in danger.
Ian Lee, a professor at Carleton University who has worked for decades in personal banking, says this hysteria, if left unchecked, is the ultimate threat to a financial system.
“When you have a fear of the entire system coming down, that’s in a completely different category. That’s catastrophic, that’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 one lender falls, the fear of underlying instability erasing consumer deposits can start a domino effect that hits the next bank showing signs of stress.
“That’s what drives the contagion. And then it can spread from one bank to another unbelievably rapidly — almost like a COVID pandemic, where the virus spreads at unbelievable speeds throughout the population,” he says.
Policymakers around the world have moved to get ahead of these worries in recent days in an effort to stabilize sentiment around the banking system.
U.S. Treasury Secretary Janet Yellen told Congress on Thursday that the financial system “remains sound” and Americans can “feel confident” about their deposits.
“The government took decisive and forceful actions to strengthen public confidence” in the U.S. banking system, Yellen said in testimony before the committee.
Silicon Valley Bank collapse: Yellen assures Congress banking system ‘remains strong’
Her comments echo reassurances from Canada’s finance minister, Chrystia Freeland, who said through a spokesperson earlier this week that Canadians can be confident that the country’s financial institutions are “stable and resilient” with sufficient guardrails in place.
But Yellen also acknowledged to Congress that once a bank run starts, it can overrun even the world’s biggest institutions.
“No matter how strong capital and liquidity supervision, if a bank has an overwhelming run that’s spurred by social media or, whatever, so that it’s seeing deposits flee at that pace, banks can be put in danger of failing,” she said Thursday.
“One of the reasons we intervened and declared a systemic risk exception is because of the recognition there can be contagion in situations like this and other banks can then fall prey to the same kinds of runs which we certainly want to avoid.”
What does this mean for Canada?
The questions of confidence in the global banking system come as the world economy braces for an economic slowdown, fuelled in part by rising interest rates in many jurisdictions.
Some market watchers had expected the European Central Bank to rein in its telegraphed interest rate increase on Thursday amid the recent uncertainty. But the ECB followed through on its 50-basis-point rate hike aimed at tamping down inflation in Europe.
The U.S. Federal Reserve faces similar pressures at its decision on Wednesday of next week, with the Bank of Canada’s next interest rate meeting scheduled for April 12.
Is the demise of Silicon Valley Bank the break Canadian home buyers have been waiting for?
Antunes says the financial system uncertainty adds another wrinkle to central bank decision-making.
If the global economy slows further amid continued banking turmoil, or if consumers and businesses rein in their spending simply because they’re wary of steeper downturns, that could serve to slow the pace of inflation more sharply than forecasts are currently expecting.
“In a way, perhaps this is what the central banks are looking for,” Antunes says. “Perhaps we will see central banks easing up, … not increasing rates too much going forward.”
In the past week, money markets have flipped their expectations for the Bank of Canada’s rate path and are now pricing in higher odds of a rate cut before the summer rather than an additional hike.
Stephen Brown, deputy chief North America economist at Capital Economics, told Global News in an email Thursday that unless the global banking turmoil “escalates dramatically,” he thinks rate cuts coming that early would be “very unlikely” given the relatively low risk to deposits in Canada compared to the U.S.
He said Capital Economics is maintaining its call for a moderate recession hitting Canada in 2023 with rate cuts coming before the end of the year.
Bank of Montreal economists also said in a revised rates scenario Thursday that unless the U.S. banking situation worsens and spreads into Canada, the central bank is likely to keep its interest rate on hold.
The existing rate pause, combined with lower bond yields driving down some fixed-rate mortgages, could restimulate the housing market in the months ahead and drive up economic activity again, according to BMO’s Michael Gregory and Jennifer Lee.
As a result, BMO expects the Bank of Canada will hold its rate steady for the rest of the year as increases to date take hold in the economy, with cuts beginning in early 2024.
— with files from Global News’ Anne Gaviola, Reuters and The Canadian Press
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