Swiss Bank Shares Plunge; Should We be Worried?

Mar 16, 2023

Swiss Bank Shares Plunged and has sent shockwaves through the global banking sector, following the collapse of California’s Silicon Valley Bank. Credit Suisse, one of the largest European banks, has seen its shares hit an all-time low, triggering fears over the stability of the banking sector. Let’s take a look in detail what are the causes of the plunge in Credit Suisse’s shares and what it means for the banking industry as a whole.

Why did the Swiss Bank Shares Plunge?

Credit Suisse’s stock dropped more than 30% after its main backer, Saudi National Bank, ruled out new funding due to regulations that limit its stake to 9.9%. This raised concerns about potential flaws in the banking sector, which is still reeling from Silicon Valley Bank’s failure. Concerns about Credit Suisse, which is regarded as systemically important to the global financial system, aggravated the situation.

Should We Be Worried?

While it is understandable that market movements can cause customers to panic and withdraw cash, resulting in a run on deposits that is risky for smaller banks, larger banks, such as Credit Suisse, are expected to be in a much stronger position as a result of government rules and regulators’ annual stress testing implemented following the financial crisis.

In the worst-case scenario, systemically important banks are supposed to have enough capital and “living wills” in place to fail in a relatively orderly manner. These living wills, however, have yet to be put to the test by a real-life banking failure. It is important to remember that share prices reflect investor sentiment rather than actual balance-sheet strength.

What Does This Mean for the Banking Industry?

The failure of Silicon Valley Bank has raised new concerns about the banking industry’s stability. Credit Suisse’s problems are not unique, and they have been exacerbated by a string of significant financial losses and scandals. Some investors are also concerned about potential unrealised losses in European banks’ investment portfolios.
However, it is worth noting that following the 2008 financial crisis, regulators around the world imposed tighter restrictions, particularly on banks deemed critical to the global financial system. Most central banks and national regulators have implemented annual stress tests to determine whether banks can withstand severe economic shocks and market turmoil while continuing to support their customers.
While the drop in Swiss bank shares is concerning, it is important to remember that larger banks, such as Credit Suisse, are expected to be in a much stronger position as a result of government regulations and annual stress testing by regulators. The failure of Silicon Valley Bank has certainly raised new concerns about the banking industry’s stability, but it is too early to tell whether this is the beginning of a full-fledged banking crisis, although we are seeing clear signs of it.
We are likely to see more distress in bank stocks since we have had three major events with Signature and Silicon Valley Collapse last week, that have shaken investor trust in bank stocks in the short term, and another similar event could be catastrophic for bank stock confidence. All bank stocks in Australia has been down at least 15% in the last 30 days.

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