Why banking fears just came roaring back

New York CNN  — 

Just as the panic over the US banking system appeared to fade, a fresh burst of anxiety blew in from Europe on Wednesday.

Credit Suisse shares crashed more than 20% in Zurich after the bank’s biggest shareholder chose not to increase its funding, dragging down European bank stocks along with it. US stocks opened sharply lower after Tuesday’s strong rally.

Why are traders seeing a connection between the Credit Suisse turmoil and the collapse of two US banks last week?

It’s mostly psychological. Large European lenders like Credit Suisse had little exposure to either Silicon Valley Bank or Signature, the two regional banks that were taken over by federal banking authorities last week.

Credit Suisse is facing unrelated problems that happened to escalate at the same time, compounding worries about the banking sector on both sides of the Atlantic.

“Credit Suisse has been a slowing-moving car crash for years,” wrote Peter Boockvar, chief investment officer of Bleakley Financial Group. “But now today’s news of course is happening in the vortex of SVB.”

The “global bank psychology” is already fragile, Boockvar said.

Investors around the world were thoroughly rattled by the collapse of Silicon Valley Bank and Signature, making the banking sector particularly vulnerable to any signs of trouble.

Wall Street had hammered regional bank stocks even after the government announced a rescue plan Sunday night, fearing a crisis would spread to similarly positioned midsize lenders. But by Tuesday, investors seemed satisfied that no other banks would need to be rescued, and stocks rallied.

But the euphoria proved fragile in the face of new headaches for Credit Suisse, once a big player on Wall Street that has buckled under regulatory and financial pressure. Customers withdrew billions from Credit Suisse last year, contributing to the bank’s biggest annual loss since the financial crisis in 2008. Its stock is down 68% over the past 12 months.

In short, the collapse of Silicon Valley Bank didn’t cause Credit Suisse to stumble, but it did put the embattled bank under even more intense scrutiny.

At the same time, European and US banks are facing a similar macroeconomic environment of suddenly higher interest rates following years of ultra-low (and even negative) interest rates that have eroded the value of some of their underlying assets.