Topline
Regulators seem to have helped avoid a global financial contagion after recent bank crises in the U.S. and Switzerland, but investors remain unconvinced the global economy is sound.
Credit Suisse logo on its London headquarters (Photo by Dan Kitwood/Getty Images)
Key Facts
A financial contagion occurs when a negative event in one economy or market causes similar events to spread to other, sometimes unrelated, economies or markets regionally, nationally or globally.
The Federal Deposit Insurance Corporation (FDIC) and Federal Reserve intervened to avoid national contagion by guaranteeing some deposits and starting a year-long loan plan to help banks saddled with devalued securities like treasury bills after Silvergate Bank, Silicon Valley Bank and Signature Bank collapsed in quick succession earlier this month.
Without the Treasury Department’s intervention, disillusioned investors and depositors withdrawing from financial institutions en masse could have caused banks to fail across the country, even if they weren’t connected to the original three banks that failed.
While no other national banks have collapsed, investors seem far from confident—despite repeated assurances that the American economy is healthy, the stock market fell several times last week as panicked investors sold off their holdings.
Swiss regulators arranged for Union Bank of Switzerland (UBS) to buy Credit Suisse this weekend to stave off global contagion after the Swiss bank’s stocks plunged as much as 21% after it found “material weaknesses” in its financial 2021 and 2022 financial reporting last Tuesday.
Key Background
Silicon Valley Bank, SVB, collapsed on March 10 after it reported a $1.8 billion dollar loss from selling devalued treasury bills two days earlier. Signature Bank failed on March 12 after panicked investors tried to withdraw billions of dollars the same day SVB failed. Though investors started pulling out of Credit Suisse three days after Signature Bank’s failure, the Swiss bank isn’t a victim of global contagion—investors were responding to the bank’s discovery of “material weaknesses” in its 2021-2022 reporting, as opposed to panicking over global economic instability. Regardless, the bank’s impressive global reach prompted Swiss regulators to step in and prevent the bank from failing: the Swiss National Bank lent Credit Suisse $54 billion last Thursday, raising share prices 33% before the bank’s purchase over the weekend.
Further Reading
What’s Happening With Credit Suisse, Explained: Embattled Bank Rattles Stock Market As Banking Crisis Deepens (Forbes)
Bank Bailouts—What They Are and Why Some Experts Say Signature Bank and SVB Didn’t Get One (Forbes)
Financial Contagion in the Era of Globalized Banking (OECD)
Source: https://www.forbes.com/sites/emilywashburn/2023/03/21/what-is-a-financial-contagion-and-is-it-happening-now/