Global Banking Sector in Turmoil as Credit Suisse Collapse Sparks Contagion Fears.

Over the last two weeks, the global banking sector has been experiencing turmoil following several bank collapses in Europe and the US. The collapse of Silicon Valley Bank (SVB) on March 10 has created concern about the health of the global financial system despite the efforts of governments and financial regulators to reassure investors and rescue troubled lenders. However, the collapse of Credit Suisse over the weekend has reignited fears of contagion across the financial sector.

Credit Suisse, one of 30 banks considered to be of systemic importance to the global economy, had approximately $1.1 trillion in assets in 2021, making it the 45th largest lender in the world. The bank’s sale to UBS delivered a blow to Switzerland’s reputation for financial stability and sparked volatility in financial markets. The merger has raised concerns about the proliferation of institutions deemed “too big to fail”.

Despite the efforts of authorities to shore up confidence, investors are skittish amid speculation that other financial institutions could soon land in trouble. While US regulators hoped to shore up confidence by guaranteeing deposits at SVB and Signature Bank, the ongoing turmoil in the banking sector has created concern about the nature of Credit Suisse’s takeover. Swiss authorities marked the value of $17 billion of bonds down to zero while allowing shareholders to keep $3.2 billion of their investment, which has outraged those who lost all of their investments. Some bondholders have argued that the move goes against the law and have raised the threat of legal action. The merger of Credit Suisse with UBS has also raised concerns about the proliferation of more institutions deemed “too big to fail.”

There are indications that authorities are planning further actions to shore up confidence. In the US, financial regulators are considering temporarily guaranteeing all bank deposits, which are currently protected up to only $250,000. However, extending protections to all deposits would raise questions about moral hazard. In the longer term, Democrats, including US President Joe Biden, have flagged the need to tighten the oversight of banks, including restoring key provisions of Dodd-Frank reforms that were rolled back under the administration of former President Donald Trump.

Among the changes being sought by Democrats, who would likely face resistance from Republicans, is the creation of a financial regulator to oversee the banking sector. The ongoing turmoil in the banking sector is likely to persist as investors remain skittish amid concerns about the health of the global financial system.

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