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Financial contagion spreads to Europe

https://www.cnbc.com/2023/03/15/credit-suisse-shares-slide-after-saudi-backer-rules-out-further-assistance.html

Shares of Credit Suisse on Wednesday plunged to a fresh all-time low for the second consecutive day after a top investor in the embattled Swiss bank said it would not be able to provide any more cash due to regulatory restrictions.

Trading in the bank’s plummeting stock was halted several times throughout the morning as it fell below 2 Swiss francs ($2.17) for the first time.

The share price rout renewed a broader sell-off among European lenders, which were already facing significant market turmoil as a result of the Silicon Valley Bank fallout. Several Italian banks on Wednesday were also subject to automatic trading stoppages, including UniCredit, FinecoBank and Monte dei Paschi.

Credit Suisse’s largest investor, Saudi National Bank, said it could not provide the Swiss bank with any further financial assistance, according to a Reuters report, sparking the latest leg lower.

If (or when) Credit Suisse fails, I would expect it to be bailed out by the government(s), because that would certainly mark the end of the banking system as we know it. The question is whether or not they are ready for the system to crash. Are they ready to replace it with a new digitized system? Personally, I think they are being forced to do so earlier than they had anticipated and that the new system will fail as well.

Many companies are taking their money out of regional banks and transferring it to some of the banks that are considered to be “too big to fail.” They think these big banks may be safer.

The Dodd-Frank bill forbids government bailouts, but they are now redefining the terminology in order to do it anyway. They claim it is not a bailout, but it’s still a bailout. The law says that they are to shift to bail-ins, so that depositors have to pay for the bank failures. So essentially the Biden administration has simply decided to bail out those who are supposed to be bailing in.

It’s an interesting twist. When the first few banks fail, depositors can be bailed out by the Fed, but how long can this last? Can they bail out every depositor on the planet? How much money would they have to create (out of nothing) to do this? I think they are hoping to stop the contagion before it goes that far, but the entire system is based on trust and confidence. What happens when people lose confidence in the banking system itself? Where do they put their money?

Many are turning to precious metals, such as gold and silver, so we are starting to see a rise in prices. It will be interesting to see if this will continue.

By the way, Barney Frank, the co-author of the Dodd-Frank bill, left congress and joined the board of Signature Bank—which failed a few days ago. I detect some irony in there somewhere.