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An illustrative stock chart and Credit Suisse logo displayed on a phone screen.
Europe now feels the US financial panic
It's been hell week for banks on either side of the Atlantic. Days after the collapse of Silicon Valley Bank and Signature Bank sent shockwaves through the US financial system, now Credit Suisse, a major European bank, is in serious trouble.
Credit Suisse lost roughly 30% of its value Wednesday after disclosing major internal problems, which prompted its largest shareholder, Saudi National Bank, to refuse to give the bank more cash. But then its shares rebounded sharply Thursday thanks to a $54 billion lifeline from the Swiss central bank.
What does this tell us about the state of the global financial system? First, that the US jitters over SVB/SB are reverberating around the world, which means that any bad news about banks is going to get a lot more eyeballs than before. And while Credit Suisse does not yet pose a systemic risk, it might leave big holes in the balance sheets of other European banks if it goes under.
"European central bankers are probably thinking: This can't happen here," says Eurasia Group expert Jens Larsen. "But what's happening in the US will make them think twice."
Second, while big banks are more tightly regulated since 2008, they are not immune to the blowback from high-interest rates. The same way that SVB/SB lost a lot of money when the Fed raised rates to curb inflation, European banks are in a similar spot because the European Central Bank is following the Fed's lead.
Yet, unlike the Fed, Larsen says that whatever happens, the ECB will almost certainly push ahead with another hike on Thursday because "financial stability won't drive ECB monetary policy decision-making.”
Still, if the (in)stability continues, perhaps the ECB may need to rethink its approach and be as flexible as the current fluid situation demands.
The Federal Reserve building is pictured in Washington, U.S.
SVB collapse & interest rates: What’ll the Fed do?
US markets rebounded Tuesday, temporarily calming fears that the collapse of Silicon Valley Bank might trigger a domino effect that makes both investors and ordinary Americans lose confidence in the banking system. But the uncertainty ain’t over yet.
With the stakes so high, who you gonna call? No, not those guys. We mean the Federal Reserve.
Many of SVB's problems can be traced back to interest rates, which are the Fed’s thing. If you lean right, you probably think SVB’s financial ruin is the result of near-zero rates that made lending too cheap. But if you’re on the left of the political spectrum, you likely blame the bank's demise on the Fed reversing that policy and jacking up rates too much, too fast, which pushed up the cost of borrowing and ultimately killed SVB’s balance sheet.
That's all water under the bridge. What matters now is the Fed's next move.
The US central bank will decide on March 21-22 whether to hike rates further or leave them be. And the Fed is coming under growing pressure to do the latter to calm down jittery investors, Americans worried about the safety of their deposits, and uneasy foreign markets.
On the one hand, a fresh hike would make sense because inflation — the whole reason to increase rates in the first place — remains too high. Indeed, the US Consumer Price Index, which dropped Tuesday, showed that year-on-year inflation eased last month to 6%. Not bad, but still far from the Fed's 2% target.
Yet, holding off (for now) on rate hikes might signal that the Fed is bullish on US regional banks surviving the SVB fallout. Also, the job market is still tight, which reduces the odds of a US recession in 2023.
Don’t forget: A lot has happened in the financial world since SVB crumbled last Friday. And a lot more can still happen by the time the Fed has to make its call.U.S. President Joe Biden delivers remarks after the collapse of Silicon Valley Bank (SVB) and Signature Bank in Washington, D.C., March 13, 2023.
SVB collapse: Don’t say the B-word
US President Joe Biden on Monday addressed the nation to assure Americans that, whatever the fallout from the collapse of Silicon Valley Bank, their deposits and the entire banking industry are both "safe."
US markets responded with mixed signals to Biden's speech. On the one hand, stocks initially tumbled over fears that other regional banks might soon crumble too (banks in general took a hit because high-interest rates are really hurting their bottom line). On the other, non-bank stocks closed in the black due to growing chatter that next week the Fed might hold off on further rate hikes to give the financial sector some breathing room.
The situation remains fluid, and it's still too early to say whether the so-called "backstop" measures taken by US authorities will be enough to stop the risk of SVB's insolvency infecting other regional banks.
For more on how we got here, read our explainer Q&A with Eurasia Group’s Celeste Tambaro here.
Meanwhile, the more uncertainty, the louder the calls will get for Biden to do something more. Perhaps even (gasp!) the B-word: bailout. That would be very bad news for the president, who knows that bailouts are politically toxic. So toxic, in fact, that opposition to them brings together odd bedfellows like Sen. Bernie Sanders (I-VT) on the democratic-socialist left and Rep. Thomas Massie (R-KY) on the libertarian right.
For Sanders, SVB's collapse is a direct result of the Trump administration's 2018 push to deregulate smaller banks, as if we had learned nothing from 2008 — not to mention the savings and loan crisis of the 1990s. For Massie, the culprit is the Fed for keeping interest rates too low for too long, which spurred the rise of piggy banks for venture capitalists like SVB, and then for raising rates to tame inflation.
Sanders and Massie agree that bailouts create a moral hazard by encouraging banks to gamble with people's money. In this case, though, what US regulators have done is bend the rules for SVB depositors, including many tech companies.
Yet, what if the Biden administration needs to consider a bailout to prevent a financial meltdown? It's pretty clear how Sanders and Massie will vote, but other lawmakers might need to make a tough choice. And if both parties are too scared of their flanks, political paralysis is all but assured.
What do you think? Let us know here and we might include your response in an upcoming edition.Silicon Valley Bank logo seen through broken glass.
Yellen brings bazooka to stop SVB contagion
The US government on Sunday night announced measures to stop the collapse of Silicon Valley Bank from leaving 97% of its depositors holding the bag — and to avert another financial crisis (without spending taxpayer money).
After failing to find a buyer for SVB, the Treasury Department, the Fed, and the FDIC told depositors with more than $250,000 parked in SVB accounts — the federally insured limit — that they'll have access to their cash on Monday morning. That’ll hopefully stop the panic that's been bubbling since Friday, when SVB — the financial institution of choice for VCs and tech startups — was closed down due to insolvency.
Separately, cash-strapped regional banks will be allowed to borrow money directly from the Fed instead of by selling bonds and other securities. That should, US authorities argue, help ward off a wave of bank runs that could threaten the entire banking system.
Meanwhile, the British government and the Bank of England arranged the sale of SVB's UK subsidiary to HSBC, Europe's biggest bank.
"[Treasury Secretary Janet] Yellen brings the bazooka to move quickly to stop the contagion of the bank run to other banks," says Rob Kahn, managing director for geo-economics at Eurasia Group. But it's still too soon to know whether this will be enough.
On the one hand, the decisive action by US regulators should calm down jittery investors who are scared that SVB might be only the first of many overexposed regional banks to fail. (Indeed, on Sunday the Fed also shut down New York-based Signature Bank, with $110 billion in assets.) On the other hand, the fact that no one wants to buy SVB could hide bigger problems that could be systemic in nature. In other words, we might be able to save depositors from one, but not all.
So, what might happen next? Large US banks are safe because, since 2008, they have been subjected to regular stress tests and capitalization requirements to ensure solvency. “This prevents a situation like SVB’s blow-up from infecting the entire system," says Celeste Tambaro, head of Eurasia Group's financial institutions practice.
But smaller, regional banks get more leeway, and this flexibility might come under the spotlight if volatility persists. What's more, right now all banks face increasing pressure to ensure profits in the face of high-interest rates, which makes borrowing more expensive and clients demand higher yields for their deposits.
"The backstop might be enough to quell the concerns of the tech community for now," says Tambaro. Until the authorities stepped in to stop the bleeding, many tech firms worried they wouldn’t be able to meet payrolls or pay suppliers. And that, in turn, could have sparked another round of layoffs in a sector that's shed tens of thousands of workers since mid-2022.
And then, of course, there's the politics of it all, with President Joe Biden in what pollster Nate Silver described on Twitter as a "no-win position." Biden knows that rescuing SVB, if it comes to that, would be as unpopular as the 2008 bailouts of big Wall Street banks and the US auto industry. But a severe financial crisis would similarly hurt him and dramatically imperil his reelection bid.
Progressive Democrats don't want Biden to help the tech bros that SVB bankrolled, and 2024 GOP presidential hopeful Ron DeSantis blamed the bank for — we kid you not — being woke.
Still, the big question is how US markets will respond. We’ll know by early Monday morning whether Wall Street follows the mixed signals from Asia and Europe.