After a string of scandals and major investors withdrawing their finances, global investment bank Credit Suisse is in turmoil.
After the collapse of Silicon Valley Bank and Signature Bank in the United States last week, fears are spreading over the stability of the global banking sector, and both investors and markets are on edge.
Confused about what it all means, and whether it will have any impact for us here in Australia? Let’s break it down.
What happened to Credit Suisse?
Overnight on Wednesday, Credit Suisse shares crashed by as much as 30 per cent — a record low for the bank.
That’s a significant number by any means, but there were a couple of reasons behind the drop:
- 1.Credit Suisse said it had found “material weaknesses” in its financial reporting; and
- 2.Its largest shareholder said it could not provide further support to the bank by buying more of its shares.
That shareholder is Saudi National Bank, which has a 9.88 per cent stake in Credit Suisse.
They said purchasing more Credit Suisse shares was a “regulatory” issue (it is unable to have a stake greater than 10 per cent), but said it believed the business otherwise was in good shape – with the caveat that it was no longer going to help the Swiss bank grow.
That all culminated into a sell-off of Credit Suisse shares overnight on Wednesday, with stocks crashing by 24 per cent at the close of trade.
It sounds like a kneejerk reaction, but the alarm bells have been ringing well before this.
Last year, financial markets were worried about whether Credit Suisse was going to be able to fund itself (and pay its debts), which meant the price of its credit default swaps (or a contract between two parties that allows them to swap or offset their credit risk) surged.
In recent years the bank has been plagued with a bunch of scandals — including tax evasion, money laundering, the collapse of Greensill Capital, and a rotating door of chief executives — and its share price has been falling consistently has a result.
But despite Credit Suisse reassuring the market it had the cash buffers it needed, its share price hasn’t stopped falling, and its customers (who are largely wealthy clients and businesses, not mum and dad investors) have been steadily taking their money out.
That, coupled with Credit Suisse’s “weaknesses”, Saudi investors planning their exit, and the banking crisis in the US (more on that in a bit) has the global financial market spooked — and the Swiss investment bank firmly in headlines.
Is Credit Suisse going to collapse?
It’s unlikely.
On Thursday the bank was provided with a 50 billion Swiss francs ($81 billion) lifeline from the Swiss National Bank.
It’s a rare but significant move by a central bank, but is essentially providing guaranteed funding to ensure Credit Suisse meets its regulatory obligations.
Before coming to its aid with the lifeline, Switzerland’s central bank said it was prepared to act, and would support Credit Suisse if need be.
Is this connected to Silicon Valley Bank and Signature Bank?
Yes and no.
The timing is not coincidental, but what happened to Credit Suisse is a bit different to what happened to Silicon Valley Bank and Signature Bank over in the US.
Silicon Valley Bank’s demise came from having too many long-term US Treasury bonds that plunged in value as interest rates rose, and having to sell them at significant losses.
Credit Suisse is a victim of longstanding financial weaknesses which it outlined earlier this week, but its troubles have been brewing for a while.
Andrew Kenningham, the chief European economist for Capital Economics, says Silicon Valley Bank’s sudden demise has resulted in greater scrutiny of banks generally — and Credit Suisse’s bad news was always going to come out.
“There’s sort of contagion — not because they [SVB] had any connection with Credit Suisse, but because investor sentiment changed and people were scrutinising other banks more carefully and Credit Suisse is seen as the weakest link,” he says.
All of this is to say that the timing couldn’t be worse for the global financial market anxiety that’s currently permeating.
Does this mean we’re going to have another global financial crisis?
It’s quite unlikely, but not impossible — after all, this situation has a lot of moving parts.
More banks could face challenges because they also hold a lot of their investments in government bonds.
But chief investment strategist at Barrenjoey, Damien Boey, says it depends on whether what we’re seeing in the markets is systemic amongst banks, or if it’s just “one-off things” for individual banks.
However it’s worth pointing out that governments, regulators and central banks around the world are taking steps to prevent another crisis from happening.
And of course, regulations have changed since the 2008 global financial crisis, which means the world’s biggest investment banks are forced to hold large amounts of cash to survive a future financial crisis.
Will any Australian banks collapse?
It’s extremely unlikely.
Treasurer Jim Chalmers says initial advice from regulators is that any fallout for Australia’s broader financial system is unlikely to be significant.
“Australians should be reassured that our institutions are solid, our banking sector is well-capitalised, and we’re in a better position than most other nations to deal with the challenges we face in the global economy,” he said on Thursday.
It’s a view shared by Professor Fariborz Moshirian, a global financial stability expert from the University of New South Wales.
“At this stage there is no need for any concern about the Australian banking system and its resilience,” he says.
“The Australian banks are well-capitalised, have access to liquidity and have strong balance sheets.”
Mr Boey also says Australian banks are not majorly exposed to those overseas.
“We have relatively small exposures to what’s happening abroad,” he says.
“The direct exposure of Australian banks to some of the things that have been happening in America and in Europe is relatively small.
“For example the direct exposure of Australian banks to what’s happening in Europe is less than 3 per cent of their book.
“So we’re really not too worried about the direct implications, what we’re really worried about are the indirect effects.”
Those indirect effects could include banks potentially becoming less trusting of each other and demanding a premium for borrowing and lending, which would lift global funding costs and would impact the private sector.
What’s happening with my bank shares?
Investors are rattled by what’s happening in the banking sector, to put it mildly.
If you need proof of just how uncertain the market is right now — Australian shares fell more than 2 per cent on Thursday.
Associate Professor of Finance at RMIT, Angel Zhong says investor panic, fear and the highly uncertain environment means there could be tough times ahead, particularly for bank stocks.
“In the short run there will be significant volatility in the market. In the long run the share market will revert to the fundamental level,” she says.
Are my savings safe?
Mr Boey says while there’s minimal risk of any Australian banks collapsing, savings up to a certain point are protected.
Deposits up to $250,000 are protected by a government-backed safety net called the Financial Claims Scheme.
The scheme was introduced during the 2008 global financial crisis to protect consumers in case a lender collapsed.
It covers a wide range of deposit accounts including savings and cheque accounts, term deposits and mortgage offset accounts.
But it only covers banks that are incorporated in Australia and authorised by the banking regulator.
For any money in your account over the $250,000 limit, you’ll have to claim back through the lender’s liquidation process.
You can get more details on the scheme here.
Could this affect interest rates?
It’s a changing situation with lots of moving parts, but in short: Yes.
It’s likely central banks around the world will be watching the banking fallout.
“All indications are that most central banks, including the RBA, may pause for a while or reduce the pace of increase in interest rates,” says Professor Moshirian.
“They may wish to wait and see how the current challenge in the foreign banking industry could unfold and also how it could be contained in a timely fashion.”
