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The banking crisis might not be over

Credit Suisse’s near-failure is stoking uncertainty about whether the banking crisis can be contained.

A photo of a room busy with screens. The largest one reads “Credit Suisse.”
Credit Suisse has been wracked with scandals and major financial losses over the last few years before it was bought by Swiss banking giant UBS on Sunday.
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Nicole Narea covers politics and society for Vox. She first joined Vox in 2019, and her work has also appeared in Politico, Washington Monthly, and the New Republic.

Imperiled bank Credit Suisse was bought by Swiss banking giant UBS Sunday, hours before New York Community Bank announced plans to purchase Signature Bank. The purchases were meant to calm nervous depositors in the wake of Silicon Valley Bank’s demise earlier this month, but roiling markets on Monday were a reminder that there’s still a lot of uncertainty about whether the banking crisis can be contained.

The good news is that the main factors that brought Credit Suisse to the precipice of collapse don’t seem to be a direct result of the crisis that ended Signature and Silicon Valley Bank, suggesting that other large banks probably aren’t as vulnerable as smaller, regional banks in the US. (Disclosure: Vox Media, which owns Vox, banked with SVB before its closure.)

“Every couple of months, there has been a rumor that Credit Suisse was in trouble and going to go under,” said Itamar Drechsler, a finance professor at the University of Pennsylvania’s Wharton School. “I don’t think it’s directly a result of [the current crisis.]”

Credit Suisse has been wracked with scandals and major financial losses over the last few years. In 2020, top executives at the bank resigned over a spying scandal targeting its former wealth management head, and last year, a court found that the bank failed to prevent money laundering by a Bulgarian cocaine trafficking gang. The bank also lost more than 7 billion Swiss francs in 2022, its biggest loss since 2008.

All of that may have left Credit Suisse uniquely at risk following the collapse of Silicon Valley Bank. Last week, Credit Suisse’s biggest shareholder, Saudi National Bank, said that it would not be increasing funding to the bank for legal reasons after customers withdrew more than $133 billion last year. That caused the bank’s stock price, which has been falling since 2021, to nosedive 30 percent in a single day.

Credit Suisse’s particular issues mean the impact of its struggles should be isolated for now. Lotfi Karoui, chief credit strategist of Goldman Sachs, said in a statement Sunday that there is “comfort from the limited contagion from US regional banks to larger money center banks, a trend we expect will persist.”

Why the banking crisis may not be over

But some regional banks in the US continue to struggle, with skittish depositors who are worried their money isn’t safe and are withdrawing their funds. The US Federal Reserve has started an emergency lending program to help those institutions stay afloat. And that situation, more than Credit Suisse’s issues, has some economists concerned the banking sector’s problems could set off a long-anticipated recession.

A new paper from researchers at the University of Southern California, Northwestern University, Columbia University, and Stanford University suggests that nearly 190 banks could experience crises similar to that of Silicon Valley Bank — that is, if customers with deposits that exceed the $250,000 limit on deposits insured by the Federal Deposit Insurance Corporation (FDIC) decide to withdraw their money. Reuters reported Monday that, on the whole, efforts to calm depositors appear to be working, with some even putting money they’d taken out back in those banks. Some regional banks, however, are notable exceptions.

What’s being done to stop the banking crisis?

The Fed has already invoked several tools at its disposal to staunch the bleeding. It has provided more frequent access to swap operations for foreign banks, essentially providing more US dollar funding to improve liquidity. It is lending to banks at record levels through a program called the “discount window,” under which banks can take out loans for up to 90 days at the federal discount rate by pledging collateral, such as loans and securities. (The Fed says it’s never lost a cent to banks on the program.) And on top of that, it has launched a program to help banks get easy access to up to one-year loans. As of Friday, banks had already borrowed $11.9 billion under the so-called Bank Term Funding Program.

The best way to boost depositors’ confidence might be to do what banks have been asking for: raising or eliminating the $250,000 cap on FDIC-insured deposits. However, that would require congressional intervention, which might be a tall ask. At least four members of Congress, including both Democrats and Republicans, have signaled support for the idea.

“I think the clear thing that would get right at the deepest concerns would be to just ensure virtually all these deposits for the moment like they’re asking and just stop this completely,” Drechsler said. “Despite it being something that a lot of people will say encourages moral hazard — and there may be some truth to that — right now, that would that would be the strongest thing you can do.”

There is also a question as to whether the Fed will continue its strategy of raising interest rates to combat still-rising inflation. The Fed is expected to announce a quarter point rate hike this week, but some economists argue that could pose a risk to the health of the financial system.

“I would raise the probability of a recession given what’s happened in the last week,” Jay Bryson, chief economist at Wells Fargo, told the New York Times.

But for now, the economic indicators aren’t really pointing in that direction, Drechsler said. Hiring remained strong in February, and unemployment is at its lowest level in 54 years.