Are the problems facing Credit Suisse and SVB related?

Credit Suisse’s shares fell nearly 22% in Zurich on Wednesday as the cost of buying insurance against the risk of a default rose to a new record. The sell-off extended to other European banking shares which saw French and German banks like BNP Paribas, Societe Generale, Commerzbank and Deutsche Bank falling between 8% and 10%. Last year it experienced large-scale customer withdrawals and its CEO, Ulrich Körner has admitted to a “material weakness” in its financial reporting while scrapping bonuses for top executives. Its woes have brought renewed focus to the issues facing beleaguered banks, particularly those in Europe.

Credit Suisse is Switzerland’s second-largest bank, however, the impact of loose monetary policy, negative interest rates and Europe’s many banking regulations have left it, alongside its counterparts, grappling to maintain an even financial keel, with investors jittery about looming litigation from the US.  The impact of slumping crude oil prices caused a rash of regulatory crackdowns on distressed debt in the energy sector, with banks like JPMorgan and Wells Fargo forced to write off billions of dollars, dragging down the whole industry in general. The Financial Times reports that around 140 European banks are considered fragile, with 100 of them being in Eastern Europe, according to Reuters.

The enormous debts taken on by developing countries over the past few decades has also come back to haunt the banking sector as the global economy slows. Banks put billions into emerging markets in anticipation of a boom that never really arrived, with countries like China, Russia and Brazil slowing down more quickly than expected causing investment droughts. Since 2008, banks globally have had to fork out a total of $153bn in penalties due to various misdemeanours, such as market manipulation, according to the FT. This combined with mounting regulation and negative interest rates has almost resulted in a toxic cocktail for banks around the world.

There are some encouraging signs, however, in the banking industry. JPMorgan recently announced that it would start raising salaries for its lower end employees after a US regulatory crackdown ensuring compensation policies are considered in stipulating risk taking. The move away from huge bonuses has been welcomed by some and pressure is mounting for others to follow suit. Another idea that could bring respite to beleaguered banks are the reforms suggested by former Bank of England monetary policy committee member, Andrew Sentance. Speaking on BBC Radio 4, he advocated cutting back on complex regulations that have been introduced since 2008. Simpler regulation would make it easier for banks to operate and in turn the public would feel more confident in the security of their finances.



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