Switzerland under pressure to intervene on Credit Suisse as bank rout deepens

Credit Suisse (CSGN.S) shares dropped by as much as 30.8%, leading a 7% fall in the European banking index (.SX7P), while five-year credit default swaps (CDS) for the flagship Swiss bank hit a new record high, reviving fears of a broader threat to the financial system.

Two supervisory sources told that the European Central Bank (ECB) had contacted banks on its watch to quiz them about their exposures to Credit Suisse.

One of the sources said, however, that they saw Credit Suisse's problems as specific to that bank, rather than being systemic.

The U.S. Treasury is monitoring the situation around Credit Suisse and is in touch with global counterparts about it, a Treasury spokesperson said on Wednesday. Asked about the impact of Credit Suisse's problems on the U.S. banking system, U.S. Senator Bernie Sanders told Reuters: "Everybody is concerned."

Europe's bank index has seen more than 120 billion euros evaporate ($127 billion) in value since March 8. Among the biggest decliners on Wednesday were French lenders Societe Generale (SOGN.PA), down 12%, and BNP Paribas (BNPP.PA), off 10%.

Banking stocks have been on a roller-coaster ride this week, tumbling at the start of the week in the face of assurances from U.S. President Joe Biden before jumping on Tuesday on hopes the worst of the market rout was over.

"Markets are wild. We move from the problems of American banks to those of European banks, first of all Credit Suisse," said Carlo Franchini, head of institutional clients at Banca Ifigest in Milan.

The Swiss National Bank declined to comment on Switzerland's second-largest bank, after its largest investor said it could not provide Credit Suisse with more financial assistance because of regulatory constraints.

"There has to be some kind of game-changing decisive action to reverse and stabilise the situation," Exane's analysts said.

Credit Suisse had appealed to the Swiss National Bank and Swiss financial watchdog FINMA for a public show of support, the Financial Times reported.

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Germany's financial supervisory authority (BaFin) said it saw no direct risk of contagion and the German banking system appeared robust and capable of digesting higher interest rates.

"Our main focus is currently on some smaller banks with little surplus capital and increased interest rate risks - we are closely monitoring these institutions," a BaFin spokesperson said in a statement.

In the United States, regional banks also fell, with First Republic Bank (FRC.N) down 23%, Western Alliance Bancorp (WAL.N) up 5% and PacWest Bancorp (PACW.O) off around 20%. Big U.S. banks such as JPMorgan Chase & Co (JPM.N), Citigroup (C.N) and Bank of America Corp (BAC.N) slid by between 2% and 6%.

BlackRock (BLK.N) Chief Executive Laurence Fink warned on Wednesday that the U.S. regional banking sector remained at risk, and predicted further high inflation and rate increases.

Fink described the financial situation as the "price of easy money" and said in an annual letter that he expected more U.S. Federal Reserve interest rate increases.

He said that after the regional banking crisis "liquidity mismatches" could follow because low rates have driven some asset owners to raise their exposure to higher-yielding investments that are not easy to sell.

"It's too early to know how widespread the damage is," Fink wrote, adding: "The regulatory response has so far been swift, and decisive actions have helped stave off contagion risks. But markets remain on edge."

Rapid rises in interest rates have made it harder for some businesses to pay back or service loans, increasing the chances of losses for lenders who are also worried about a recession.

However, ECB policymakers are still leaning towards a half-percentage-point rate hike on Thursday, a source told Reuters, as they expect inflation will remain high.

Investors had begun to doubt the ECB's commitment to another big rate hike as SVB's collapse rattled markets.

But the source said the central bank was unlikely to diverge from its plan to raise rates by 50 basis points on Thursday because doing so would damage its credibility.

Unease sparked by SVB's demise has prompted depositors to seek out new homes for their cash.

Ralph Hamers, CEO of Credit Suisse rival UBS (UBSG.S) said market turmoil has steered more money its way.

"In the last couple of days as you might expect we've seen inflows," Hamers said. "It is clearly a flight to safety from that perspective, but I think three days don't make a trend."

Deutsche Bank (DBKGn.DE) CEO Christian Sewing said that the German lender has also seen incoming deposits.

SVB AFTERMATH
In the United States, the focus is shifting to the possibility of tougher rules for banks, particularly mid-tier ones like SVB (SIVB.O) and New York-based Signature Bank (SBNY.O), whose collapses triggered the market tumult.

Moody's Investors Service on Tuesday revised its outlook on the U.S. banking system to "negative" from "stable", citing heightened risks for the sector.

SVB's shutdown prompted assurances from Biden that the U.S. financial system is safe, alongside emergency steps giving banks access to more funding.

The Tokyo Stock Exchange banks index (.IBNKS.T) jumped more than 4% on Wednesday, after three straight days of selling.

Investors had been particularly concerned about the huge bond holdings of Japan's lenders, but Japanese finance minister Shunichi Suzuki said differences in the structure of deposits, meant local banks would not face incidents similar to SVB.reuters

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