Credit Suisse shares have dropped to a record low as investors remain concerned following the failure of Silicon Valley Bank.
Credit Suisse’s stock dropped by 30% at one point, extending losses from Tuesday, when the company revealed “material weakness” in its accounting controls.
Investors are concerned about how the bank, which is plagued by issues, will handle the fallout from US bank failures.
Worries spread throughout the stock market, with all major indexes falling sharply.
The FTSE 100 fell 3.8%, or 293 points, in the UK, the largest one-day drop since the early days of the pandemic in 2020.
The CAC 40 index in France fell roughly 3.5%, while the DAX in Germany fell more than 3%. In Spain, the IBEX 35 fell by more than 4%.
The three major US exchanges also fell as shares in large and small banks were hit.
“The problems at Credit Suisse raise the question of whether this is the start of a global crisis or just another ‘idiosyncratic’ case,” Capital Economics’ Andrew Kenningham wrote.
Credit Suisse insisted that its financial position was not a cause for concern, with the CEO stating that its cash reserves were “still very very strong.”
However, concerns about problems at such a large international player put pressure on banking stocks around the world.
Spain and France’s prime ministers spoke out in an attempt to reassure investors as the Stoxx Europe banking share index fell 7%.
How severe is the US banking crisis, and what does it imply?
Warning that US banks will face additional hardship
Banking problems began in the United States last week with the failure of SVB, the country’s 16th-largest bank.
On Friday, US regulators shut down the bank, which specialized in lending to technology companies, in what was the largest failure of a US bank since 2008. HSBC purchased SVB’s UK arm for £1.
Following the failure of SVB, New York-based Signature Bank also failed, with US regulators guaranteeing all deposits at both.
However, fears that other banks may face similar problems have persisted, and trading in bank shares has been volatile this week.
“It’s too early to tell how widespread the damage is,” said Laurence Fink, CEO of investment firm BlackRock, in an annual letter to investors. “So far, the regulatory response has been swift, and decisive actions have helped to avert contagion risks. However, markets remain on edge.”
Credit Suisse, which was founded in 1856, has been embroiled in a series of scandals in recent years, including money laundering allegations and other issues.
It lost money in 2021 and again in 2022, its worst year since the 2008 financial crisis, and has warned that it will not be profitable until 2024.
Shares in the company had already taken a beating prior to this week, with their value falling by roughly two-thirds last year as customers withdrew funds, including 110 billion Swiss francs ($120 billion) in the last three months of 2022.
The bank’s disclosure on Tuesday of “material weaknesses” in its financial reporting controls raised new concerns, prompting the Saudi National Bank, a major investor, to say it would not inject additional funds into the Swiss lender.
The bank’s stock dropped 24% on the day.
“This banking crisis originated in the United States. And now people are watching to see if the whole thing will cause problems in Europe “According to Robert Halver, head of capital markets at Germany’s Baader Bank.
“If a bank has had even the most minor problem in the past, if major investors say we don’t want to invest any more and don’t want to let new money flow into this bank, then of course a story is told in which many investors say we want to get out.”
SVB was forced to sell US government bonds it held in order to raise funds, which was one of its problems.
However, the value of these bond holdings has fallen in the last year as the US Federal Reserve raised borrowing costs in an attempt to reduce inflation.
Many other central banks, including the Bank of England, have raised interest rates as well. Bond portfolios lose value as interest rates rise.
Because of the declines, many banks may be sitting on significant potential losses. However, the change in value is unlikely to be a problem unless other pressures, such as significant outflows of customer funds, force the firms to sell their holdings.
“The concern is that banks with large unrealised losses in their bond portfolios may not have adequate buffers if deposits are rapidly withdrawn,” said Susannah Streeter, head of money and markets at Hargreaves Lansdown.
“Although the biggest players are deemed not to be at risk, the nervousness is palpable due to the substantial layer of capital they are sitting on and the stable nature of their deposits.”