How Far Could the Banking Panic Spread?

Since the failures of Silicon Valley Bank and Signature Bank in the U.S. in recent days, banking panic has spread to European Tier 1 banks. Over the weekend, the Swiss National Bank and the country’s regulators orchestrated an emergency takeover of Credit Suisse Group AG by UBS Group AG. As part of the deal, regulators surprised credit markets by writing down USD 17 billion of Credit Suisse bonds to zero before equity.¹ How much further could the turmoil spread?

Looking at corporate-credit markets through a factor lens may provide a clue. In the left-hand exhibit below, we show banks’ credit-spread returns to U.S. and European credit, which are net of the overall market. On March 13, the U.S. banking industry experienced the largest daily loss since our data began in 2007, while the European banking industry saw its second-largest loss. On March 16, the loss in the U.S. was the third-largest. In contrast, as the right-hand exhibit shows, the U.K. banking industry has deteriorated more steadily over the course of this month and did not experience record daily losses, while banking-specific spreads have not yet widened materially in Japan.

This difference in volatility may be significant because volatility tends to cluster, meaning large returns are often followed by more large returns (in either direction). We have seen this clustering already in the U.S. last week. The near-record loss in Europe may be a sign of things to come.