Credit Suisse, a 167-year-old Zurich-based bank, was bought by its larger rival UBS this weekend in a deal backed by the Swiss government.
The £2.6bn emergency merger with UBS came on Sunday in a desperate bid to prevent damage from the wider Swiss and global financial markets.
Credit Suisse’s clients tend to be wealthy foreign individuals and companies rather than ordinary savers, but because it is the second largest lender in Switzerland and the 17th largest in Europe, it is a much bigger beast than Silicon Valley Bank ( SVB). Thus, it is strategically more important for the global financial system.
The struggling bank was widely considered “too big to fail” by pundits, but problems have been brewing for years over a string of controversies, including its connection to now-failed supply chain lender Greensill Capital, where former prime minister David Cameron was an adviser. .
This long series of scandals, management changes and financial losses came to a head last week after the collapse of SVB, with frightened investors wondering which bank would be next.
When Credit Suisse’s largest shareholder, the National Bank of Saudi Arabia, announced on Wednesday that it would not increase its investment due to regulatory rules, it added to the fears of existing investors. The value of its stocks and bonds plummeted, and a flood of customers tried to withdraw their deposits.
I explores what the UBS acquisition means for the UK and the global financial market.
What is happening now?
UBS bought rival Credit Suisse in a Swiss government-backed deal after regulators worked around the clock to get the deal done.
This sent shares of European banks falling, while shares of Deutsche Bank and UBS fell 1.8% and 3.7%, respectively, after some gains.
A controversial aspect of the bailout is that any investor holding additional Tier 1 (AT1) bonds will not be compensated after Swiss financial regulator Finma ordered a write-down of nearly £14bn of AT1.
This has led some to question the hierarchy of investor claims – Credit Suisse shareholders will receive more than £2.5bn in the deal. The move also spooked the AT1 bond market, which is valued at over £200bn.
What is the impact on the UK?
The Bank of England issued a statement last week to reassure the public that the UK banking system is not at risk and remains “strong, sound and well capitalised”.
But the Credit Suisse bailout is putting more pressure on the Bank of England not to raise rates at its next meeting, next Thursday. The merger with UBS is expected to result in the loss of thousands of jobs in the city, as the two banks employ about 11,000 people.
Does this mean that we are in for another global financial crisis?
After the problems with Credit Suisse, bank stocks plummeted, and economist Nouriel Roubini, nicknamed Dr. Crisis.
However, so far, most experts do not predict a repeat of the 2008 financial crisis, which led to the collapse of several large banks and provoked a global recession. Former Bank of England deputy governor Sir John Giv said the bailout of Credit Suisse was a key difference between this scenario and Lehman Brothers.
“Credit Suisse is similar to Lehman Brothers in scope, complexity and importance, but there is a big difference considering the Americans didn’t bail out Lehman Brothers. It generally shocked the markets because they didn’t understand it,” he said.
“Going back a few months, the first problem that came up in the financial market was the higher interest rates here in the UK on our pension funds.
“If you remember, our central bank stepped in and provided the money to make sure it didn’t leak somewhere else. So the message is absolutely clear that central banks are behind these troubled banks,” he added.
Source: I News
I am Moises Cosgrove and I work for a news website as an author. I specialize in the market section, writing stories about the latest developments in the world of finance and economics. My articles are read by people from all walks of life, from investors to analysts, to everyday citizens looking for insight into how news will affect their finances.