Stock markets tumbled Wednesday as investors’ fears over the health of the banking industry resurfaced and spread around the world, undoing a rally Tuesday when the panic appeared to pause.

On Wall Street, the S&P 500 fell 1.6% at the open of trading, reversing all of the previous day’s gains. European markets were also hard hit, with stocks of many of the region’s biggest banks falling sharply, as anxiety persists about the fallout from the collapse of Silicon Valley Bank and Signature Bank, which were seized by regulators after suffering devastating runs on deposits.

The catalyst for the day’s turmoil appeared to be Credit Suisse, the mistake-prone Swiss bank that has struggled for years to turn around its fortunes, with customers steadily shifting their assets to rival banks. It recorded the most eye-catching decline, with its shares losing roughly 30%, setting yet another record low. On Wednesday, the bank’s largest shareholder, Saudi National Bank, ruled out providing more money for Credit Suisse as it struggles with its latest turnaround plan.

S&P Global Ratings said on Tuesday that European banks had little exposure to Silicon Valley Bank or Signature Bank, nor did they view any European banks as being exposed to the same risks. “That said, we are mindful that SVB’s failure has shaken confidence,” analysts at the rating agency said.

And later Wednesday, Switzerland’s central bank announced late Wednesday that it was prepared to act, saying it would support Credit Suisse if needed. A statement from the bank did not specify whether the support would come in the form of cash or loans or other assistance. At the moment, regulators said, they believe the bank has enough money to meet its obligations.

A day earlier, Credit Suisse reported that managers had identified “material weaknesses” in the bank’s internal controls on financial reporting as of the end of last year. After the joint announcement from the Swiss National Bank and the Swiss financial markets regulator, the shares also made up some ground on Wall Street.

Credit Suisse then said early Thursday that it is taking measures to shore up its finances, including exercising an option to borrow up to 50 billion francs ($53.7 billion) from the central bank.

U.S. bank shares hit

But the shares of midsize U.S. regional banks that have been hit hard after Silicon Valley Bank collapsed resumed their declines. First Republic Bank slipped 24%, PacWest fell 14%, Western Alliance lost 7% and Zions Bank dropped more than 5%.

Shortly before the market opened, S&P Global Ratings cut the credit rating of First Republic by several notches, into so-called junk territory. “We believe the risk of deposit outflows is elevated,” the ratings agency said, noting that the bank’s deposit base is more concentrated than many other banks, with a large share of commercial clients holding balances above the $250,000 limit insured by the government.

The biggest banks also suffered somewhat, with the shares of JPMorgan Chase and Bank of America both sliding more than 3%.

The plunge in Credit Suisse’s shares set off temporary halts in its trading. Shares of two French banks, Societe Generale and BNP Paribas, fell more than 10%, while Deutsche Bank in Germany and Barclays in Britain shed 8%.

Bond markets reflect Fed dilemma

Nervousness was also apparent in the bond markets, with yields on government notes falling on expectations that the Federal Reserve could become more cautious about raising interest rates. Stubbornly rising inflation would usually call for continued higher rates, but turmoil in the banking system could require more caution. Higher interest rates raise costs for companies and were at the root of the pain felt by banks over the past week.

The Fed is scheduled to meet next week to set rates. The European Central Bank, which has also been raising interest rates to combat inflation, will meet on Thursday.

“Fed is nuts if they think they can tighten,” said Andrew Brenner, the head of international fixed income at National Alliance Securities. “They will break the bank system if they keep thinking like this.”

Futures markets still expect that Fed policymakers will raise rates by a quarter-point at their next meeting, but they now believe that the central bank will begin cutting rates in the second half of the year, setting rates at a lower level at the end of the year than they are now.

In a sign of the whipsaw trading conditions confronting traders, a measure of volatility in the bond market soared to its highest level since 2009.

‘A solid foundation’

Many analysts are quick to say the current weakness for banks looks nowhere near as bad as the 2008 crisis that torpedoed the global economy. But worries are nevertheless rising that pain spreading through the banking system could spark a downturn.

“When you have worries about contagion and a financial crisis, there is increasing risk of a global recession,” said Anthony Saglimbene, chief market strategist at Ameriprise.

“The regional banks are so important to small businesses, midsized businesses” by providing loans, he said. “They’re a centerpiece of the economy.”

“The U.S. banking system remains resilient and on a solid foundation, with strong capital and liquidity throughout the system,” Michelle Bowman, a Federal Reserve governor, said at a conference in Hawaii on Tuesday. She added that the Fed’s board of governors “continues to carefully monitor developments in financial markets and across the financial system.”

In a further sign of the global spillover of concern about the banking system, Vietnam’s central bank slashed interest rates overnight as it looks to support its economy.

And in debt markets, where banks and other investors facilitate loans to companies across the world, investors’ fears were reflected in sliding bond and loan prices on Wednesday. The moves amplified concerns about the potential knock-on effect from stress in the banking sector, and among some startup tech companies, leading to some companies being unable to repay their debts.

This report contains information from the Associated Press.