The global banking crisis: one problem is over, and many others remain to be resolved
Credit Suisse, plagued by decades of mismanagement, scandals and mismanagement, is finally succumbing to the emerging global banking crisis. The takeover by rival UBS, organized by Swiss authorities on Sunday, removed a giant, wobbly domino from the table. Hours later, a group of central banks from around the world fed the movement of the US dollar through the global financial system to continue the flow of lending to households and companies and support the world’s major economies.
The question nervous investors and clients want answered this week: What’s next? Are other banks about to fail or are they being bailed out? Will regulators have to step in with more bailouts?
Some regional banks have been on the alert in the past week, as eager clients siphon tens of billions of dollars in cash from smaller banks and put it into larger, better-capitalized institutions.
To repay customers withdrawals, regional banks scrambled to get enough cash. First Republic received a $70 billion loan from JPMorgan Chase a week ago and another $30 billion lifeline last Thursday. That still seems not enough, as First Republic Bank shares fell 33% last Friday.
Several other banks, whose identities will likely remain unknown for some time, have applied for emergency loans from the Federal Reserve over the past week. Banks borrowed a record $153 billion from the Fed’s discount window last week, another option that banks run for quick access to liquidity.
The good news: These loans do not point to anything inherently wrong with the global banking system. None of the banks that have borrowed from the Fed’s discount window have borrowed on secondary credit terms: emergency overnight loans that help deeply troubled banks keep the lights on. These loans come with strict restrictions and more oversight from the Federal Reserve.
The fact that the Fed loans were primary credit, Gill said, “suggests that banks in need of emergency support are considered ‘healthy’ by US bank supervisors and are not at elevated risk of imminent failure.” investors on Friday.
The bad news: Banks may be doing well in general, but all this borrowing shows just how stressed the financial system is right now.
The pressure means banks may be reluctant to lend money, which adds more scrutiny to borrowers’ creditworthiness. That means fewer mortgages and less money flowing into businesses, which could slow the global economy.
This is why central banks intervened on Sunday. Their coordinated action, not seen since the European debt crisis a decade ago, represents the first indication that a banking crisis could have lasting and devastating effects on the global economy.
CNN’s Matt Egan and Phil Mattingly contributed to this report.
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