As markets fret about the health of the banking sector, are we facing a banking crisis 2.0?
- The chair of the Saudi National Bank, Credit Suisse’s largest shareholder, ruled out any further financial assistance for the bank
- Markets have been destabilised by the collapse of Silicon Valley and Signature banks.
- Larger banks may be protected but that doesn’t mean smaller banks can’t fail
Whatever sunny optimism Jeremy Hunt managed to summon up on the UK economy, it could not distract from the rout currently happening across financial markets. The catalyst was jitters about the global banking sector, after the chair of the Saudi National Bank, the biggest shareholder in Credit Suisse, ruled out any further financial assistance for Switzerland’s second largest bank.
The question of further assistance came after the group revealed that its auditor, PwC, had identified “material weaknesses” in its financial reporting controls. Shares in Credit Suisse tumbled, taking much of the banking sector with it. After the failure of Silicon Valley and Signature banks in the US, this had a distinctly Banking Crash 2.0 feel to it.
However, it is worth noting that the chair of Saudi National Bank had only ruled out further assistance because it didn’t believe the bank needed it, saying he was happy with the group’s restructuring plan. He added that it would bring additional regulatory constraints were the bank to take a larger holding in Credit Suisse. While not quite an endorsement, it did suggest that investor panic might be misplaced.
The line from many investment groups is that the larger banks are well-capitalised, thanks to new rules introduced in the wake of the financial crisis. They point out that Silicon Valley Bank was uniquely exposed to rising rates and the under-pressure venture capital sector. Credit Suisse’s problems also appear idiosyncratic with a litany of scandals and mismanagement. The rules put in place after previous banking crisis did not mean that banks couldn’t fail, just that there would be no contagion when they did.
The sceptics suggest the banks may be sitting on significant losses, having been forced to buy bonds at low or negative yields just before a large jump in interest rates. BlackRock chief executive Larry Fink warned that the US regional banking sector remained at risk and said the recent crisis was the “price we’re paying for decades of easy money”. He said any bank relying on leverage would be under pressure.
However, Fink concluded on a brighter note, suggesting that banks would inevitably curb lending, which would bring more companies to capital markets in search of funding. This would create opportunities for investors.
There may not be a systemic problem in the banking sector. However, that doesn’t mean there won’t be repercussions for banks and for the companies that rely on them for funding. Inevitably this will create wobbles in already-nervous financial markets.
