Credit Suisse, one of the largest banks on the planet, has been bailed out in all but name by the Swiss government to the tune of £44bn, with the promise of more to come if needed.
For much of the last week, the Swiss giant had been hammered by speculation over its future after its management was forced to admit on Tuesday that its earlier accounts contained “material weaknesses”.
A few days days before, the California-based Silicon Valley Bank (SVB), a smaller-scale provider of banking services to the state’s huge tech industry, had failed, prompting a rush to bailout this bank by the US government.
Speculation has since swirled around USA’s smaller, regional banks, with financial market traders believing that the combination of rising interest rates and (potentially) poor management choices that did for SVB may also now be afflicting other banks.
Another, smaller institution, specialising in cryptocurrency lending — Signature Bank, had failed a few days previously. Smaller banks, like SVB and First Republic, had their regulations substantially relaxed in 2018, allowing them to take greater risks with their assets.
This, analysts say has left them especially exposed as interest rates have increased, and their customers are withdrawing money to place it in larger institutions.
Regulators have to close down these US regional banks banks following mass withdrawals of customer deposits from them.
Clearly, the events have shaken investor confidence and will likely lead to tightening liquidity across global debt markets. Still, the impact will likely be limited for most rated banks in Gulf Co-operation Council (GCC) countries, according to Moody’s Investor Service.
This, it said is due to structural features including their broad franchises and large government presence across the banks’ balance sheets.
Also, GCC banks are not materially exposed to the failed US banks and are not as susceptible to large losses from held-to-maturity debt securities. The spillover effects of the US bank distress are still developing, however.
Banks in the six nations of the (GCC) generally have broad franchises across retail and corporate banking. GCC banks are strongly interlinked with their respective sovereigns.
For the most part, the footprint of governments in the region can be found right across banks’ balance sheets — as borrowers, depositors and as main shareholders, creating a supportive and interlinked operating environment. Most GCC governments are highly rated. They maintain equity stakes in the banking systems, both directly and indirectly through public-sector institutions, pension funds and companies.
They anchor the banks’ funding profiles through inflows of stable deposits, which have increased thanks to higher oil-related government revenues in 2022, Moody’s noted.
Governments also provide lending opportunities to GCC banks that are playing a pivotal role in implementing the governments’ economic diversification agendas in the non-oil parts of the economy — where they conduct bulk of their lending activities — which are supported by government spending.
All these factors ensure GCC banks remain core to the regional economies and will protect them against sudden market shocks.
Bank bailouts need not indicate yet another global financial crisis. But if history is anything to go by, they should still have us all worried!