Three days after US regulators stepped in to rescue the banking sector and two bankrupt banks, the Swiss central bank offered Credit Suisse a big lifeline to restore confidence in the banking system.
Credit Suisse agreed, borrowing up to $54 billion from the Swiss National Bank. While that calmed some nerves, markets remain extraordinarily volatile. US markets were expected to open lower. Asian markets fell. European markets were only marginally higher after Wednesday’s rout.
The focus shifted again to: who’s next? What’s the next domino to fall?
First Republic Bank is the consensus choice. On Wednesday, Fitch Ratings and S&P both downgraded the bank’s credit rating, fearing depositors would withdraw their money despite federal intervention. The bank would explore strategic options, including a sale, according to Bloomberg. (That’s Wall Street for: Help!) First Republic shares fell 28% in premarket trading.
On Thursday, Fitch Ratings warned the Western Alliance bank, saying its credit rating could plummet if customers continue to withdraw money from the bank. Shares of Western Alliance, a regional bank like SVB, fell 10% in premarket trading. PacWest Bank fell 16% and shares of other regional banks also fell.
Customers continue to flee regional banks despite government intervention. Although nothing close to the collapse of SVB took place this week, many customers withdrew money from smaller banks and placed their funds in larger banks. Bank of America, Wells Fargo and Citigroup have all received significant increases in deposits since Silicon Valley Bank ran into trouble last week, people familiar with the matter told CNN.
Regulators continued to try to calm the nerves. US Treasury Secretary Janet Yellen, who is due to testify before Congress at 10 a.m. ET on Thursday, said the banking system remains secure. The Office of the Comptroller of the Currency, one of the top U.S. banking regulators, said Thursday it was strengthening oversight of the banking industry.
But Wall Street remains on edge. JPMorgan said in a note to clients that the Swiss central bank’s intervention was insufficient and Credit Suisse would most likely have to be taken over.
Meanwhile, concerns continue to shift from Credit Suisse to other parts of the banking industry.
“Credit Suisse’s problems are very different from those that brought down SVB a few days ago,” noted Neil Shearing, chief economist at Capital Economics. “But they remind us that as interest rates rise, vulnerabilities lurk in the financial system.”
Key areas to watch, says Shearing: smaller European banks, shadow banks and open-ended funds that could struggle under pressure from customers withdrawing cash – and a boatload of government bonds in their portfolios whose the value plummeted as rates rose.