Even though the government is trying to restore trust, fears of a banking disaster keep the stock markets shaking. On Friday, indexes in Europe and the United States fell as a sell-off in Credit Suisse, a big Swiss bank that is having trouble, grew.
Credit Suisse’s stock dropped 8%. The next day after getting money from the biggest US banks, First Republic shares fell by 33%. The FTSE 100 lost more than 1% by the end of the day.
The stock markets in France and Germany shut down, and the Dow Jones Industrial Average index fell 1.2%. Both the Nasdaq and the S&P 500 fell.
Investors were worried when Credit Suisse said earlier this week that it had found “significant weaknesses” in its financial reporting. At the same time, the Saudi National Bank, Credit Suisse’s biggest shareholder, said it would not be able to give the Swiss company any more money.
The company has been in trouble for a long time and is still losing money. The Swiss National Bank gave the company a £45 billion lifeline, but there are still concerns about the bank’s stability.
What the experts have said about Credit Suisse
Morningstar says that about $466 million has left Credit Suisse’s European and US-managed funds in the last few days.
Analysts Johann Scholtz and Niklas Kammer from Morningstar said that Credit Suisse’s problems were “unique” and that “even in the worst-case scenario, we feel we can handle them for the time being.”
But they warn that “things are changing quickly, and ideas that are new today may be out of date tomorrow.”
The problems at Credit Suisse, which employs more than 50,000 people around the world, including about 5,000 in London, came at the same time as the failure of two US banks, Silicon Valley Bank (SVB) and Signature Bank, which made people more worried about the health of the banking sector.
US officials stepped in over the weekend to make sure that customers of Signature Bank and SVB had full access to their funds. This was done to prevent more panic.
Still, there are worries that other banks, like San Francisco’s First Republic, could be hit by a flood of customers pulling out their money.
Its stock had dropped by more than 70% in the past week.
On Thursday, 11 US institutions said they were backing the First Republic because they “trust in the country’s banking system.”
According to US financial officials, the decision is “very welcome” and “shows how strong the banking system is.”
Over the past year, central banks worldwide have raised borrowing costs by a lot to slow down the inflation rate.
The moves hurt the prices of large portfolios of bonds that banks bought when interest rates were lower. This contributed to the failure of Silicon Valley Bank and made people wonder if other companies were in the same situation.
Silicon Valley Bank’s parent company, SVB Financial Group, filed for bankruptcy on Friday so it could sell off its remaining assets.
Chief economist at Payden and Regal, Jeffrey Cleveland, says that other institutions could be hurt.
Before the turmoil in the banking industry, the US Federal Reserve and the Bank of England were expected to raise interest rates even more at their meetings next week. But because of recent events, some people have said that these rate hikes might be slowed down or even stopped.
The European Central Bank raised rates from 2.5% to 3% on Thursday.
What’s wrong with banks right now?
All of this is happening due to a much bigger change in the world: the recent dramatic rise in borrowing costs.
Central banks worldwide, like the US Federal Reserve and the Bank of England, have been raising interest rates to slow down inflation and relieve the pressure driving up prices.
The hikes worsened SVB’s problems because they made it harder for its start-up customers to borrow money, so they had to get their money out of the bank faster.
Still, the rise in rates, which was a big change after years of low-cost borrowing, caused a much bigger problem by lowering the value of long-term bonds that banks bought when rates were lower.
Just in the United States, banks are sitting on over $620 billion in losses that haven’t been turned into cash.
If they can keep the bonds, that’s fine. But it makes it much harder for them to make money quickly if needed.
Japan, which buys a lot of US government bonds, spoke up about this worry months ago. However, analysts in Europe think it could be more important.
Most people don’t have much reason to worry about their money.
The US government has previously protected deposits up to $250,000. In the UK, the limit is £85,000.
US Vice President Joe Biden has said he will do “whatever it takes” to keep the financial system safe and reassure people that their money is safe. On the other hand, leaders in Europe, Japan, Australia, and other places have tried to calm people down.