European bank stocks tumbled significantly on Wednesday after increased market fears from the Silicon Valley Bank’s (SVB) abrupt collapse, with the already troubled Credit Suisse shares plummeting to a new low.
Regulators and banking leaders worldwide have tried to allay concerns about a global financial crisis, but worries persist.
Credit Suisse shares dropped by over 20 per cent, leading to a 6 per cent decline in the European Banking Index.
The plunge in banking shares halted their trading on several European bourses.
Worryingly, the insurance cost, known as the credit default swap (CDS), against default for the flagship Swiss bank hit a new record high.
That underscores growing investor unease and the increased risk of a default, with some experts predicting that Credit Suisse could go the Lehman Brothers way if the issues in the global financial system mushroom into a full-blown crisis.
Credit Suisse’s Saudi backer refuses further assistance
Credit Suisse has been struggling for survival for a while, and for now, there seems to be no relief for Switzerland’s second-largest lender.
That’s because its largest investor, the Saudi National Bank, has ruled out providing further financial assistance to the lender.
Shares of Credit Suisse plunged by as much as 24 per cent on Wednesday, hitting a new record low after the Swiss bank’s largest investor, the Saudi National Bank, said it could not provide more financial assistance due to regulatory issues.
The Saudi lender acquired a stake of almost 10 per cent last year after participating in Credit Suisse’s capital raising and committing to investing up to $1.5 billion.
However, Saudi National Bank Chairman Ammar Al Khudairy said the bank cannot provide additional funding as it would go above the 10 per cent regulatory threshold.
The drop in Credit Suisse’s shares weighed on broader equity markets, causing some concern among investors about the global banking system’s resilience.
Ralph Hamers, CEO of Swiss rival UBS, said the lender has benefited from recent market turmoil and seen money inflows, but he cautioned that it’s too early to make any long-term projections.
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Credit Suisse’s turmoil
Credit Suisse has been trying to recover from a series of scandals that have eroded investor and client confidence.
The bank recently published its annual report for 2022, which revealed “material weaknesses” in controls over financial reporting and ongoing customer outflows.
In the fourth quarter of 2021, customer outflows exceeded $120 billion.
To put Credit Suisse’s crisis into perspective: the lender has lost almost 75 per cent of its market value over the past year, making any investment in the company less attractive.
Despite the recent turmoil, Credit Suisse CEO Ulrich Koerner told a conference earlier this week that the bank’s liquidity coverage ratio averaged 150 per cent in the first quarter of 2023, well above regulatory requirements.
But traders are still skeptical, and Credit Suisse shares fell below the 2-Swiss-franc mark in Zurich for the first time. This is the seventh day in a row that they have gone down.
In general, lenders are also worried that a recession is coming because of aggressive rate hikes, which make it harder for some businesses to pay back or service their loans.
That is weighing on banks and stock valuations of companies worldwide.
The sell-off on Wednesday came after US bank stocks reversed deep losses on Tuesday after regulators rushed to make sure bank deposits were safe.
Before Tuesday’s recovery, global financial stocks lost $465 billion in under two trading sessions.
The latest crash is yet another reminder of the uncertain outlook after the collapse of SVB and three other banks sparking fears of a broader US banking crisis and its contagion risks.
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