The stock market bounced back yesterday following the release of the Consumer Price Index for February. Although inflation remains high, the downward direction it embarked on suggests that we are heading in the right direction to economic recovery. Thus, we thought that the bank runs that occurred were done and financial markets were safe again. Today, we see that the stock market tumbled again. The Dow Jones fell over 400 points and this drastic fall is based on the stock slump of Credit Suisse, one of the oldest and most prestigious investment banks in the world.
Credit Suisse’s stock slumped dramatically by over 25%. This slump is based on the sell-off when Credit Suisse’s largest shareholder, Saudi National Bank, said publicly that it wouldn’t beef up its investment to help steady the embattled lender. Credit Suisse shares took roughly 25% nosedive Wednesday to hit a record low. Shares in Citibank were down as much as 5%, while Goldman Sachs, JP Morgan, and Wells Fargo were each down roughly 4% Wednesday. The Dow and S&P indexes were both down by more than 1.4% this Wednesday morning, with the tech-heavy Nasdaq trading at least 1% lower.
Source: Google Finance
The Chairman of Saudi National Bank, Credit Suisse’s top shareholder, ruled out further financial intervention. The Zurich-based investment bank recorded losses in the last five quarters. Revenue declined in four of the five recent reporting periods, and Credit Suisse stock declined 68.6% over the past year. The stock decline of Credit Suisse has repercussions for the European banking system. In pre-market action, fellow Swiss bank (UBS) retreated 8%, and Germany’s Deutsche Bank (DB) also dropped 8.5%. How does the slump of Credit Suisse affect the American banking system? The slump of Credit Suisse affects banks with international exposure such as JP Morgan, Wells Fargo, and Signature Bank.
The nosediving situation of Credit Suisse isn’t just a Swiss problem but a global problem because banks are interconnected. Credit Suisse insisted that its financial position was not a concern and that it would bounce back. But investors do not share that sentiment. If investors sense instability in one part of the industry, they automatically tend to assume that this instability will spread across the whole industry, and therefore, start to use a precautionary approach to preempt the problem. The collapse of Silicon Valley Bank has alarmed investors and they are now more nervous and apprehensive about the banking sector more than ever.
“If a bank has had even the remotest problem in the past, if major investors say we don’t want to invest anymore and don’t want to let money flow into this bank, then of course, a story is being told where many investors say we want to get out,”
said Robert Halver, head of capital markets at Germany’s Baader Bank. This is exactly what Credit Swiss is currently going through, and many other banks will soon be subject to this extreme level of scrutiny because investors’ confidence in the banking sector is at its lowest point. Credit Swiss won’t be the last bank we will be hearing about. The Achilles Heel of the banking industry is that it has a domino effect. If one bank start falling off the rail, all the other banks, even the ones that are doing fine will start feeling threatened to fall off too because their investors will become apprehensive and precautionary. As a result, a panic starts and a bank run occurs.