Swiss Giant UBS Rescues Credit Suisse To Avoid Global Bank Runs

Sunday, March 19, 2023 | Tag Cloud Tags: ,

By Stefan J. Bos, Chief International Correspondent Worthy News

BERN, SWITZERLAND (Worthy News) – Troubled bank Credit Suisse has been rescued by its Swiss rival UBS as the world’s largest central banks came together to stop a banking crisis from spreading worldwide.

On Sunday, Swiss authorities persuaded UBS Group AG to buy rival Credit Suisse Group AG in what analysts called “a historic deal,” creating one of Europe’s largest banks.

Under the deal, UBS will pay 3 billion Swiss francs ($3.23 billion) for 167-year-old Credit Suisse and assume up to $5.4 billion in losses.

The agreement was backed by a massive Swiss guarantee, and the transformation process is expected to close by the end of 2023.

The Swiss government pushed for UBS to take over its smaller rival after a plan for Credit Suisse to borrow up to 50 billion francs ($54 billion) failed to reassure investors and the bank’s customers.

Credit Suisse is among the 30 financial institutions known as worldwide systemically important banks, and authorities are worried about the fallout if it fails.

Yet Credit Suisse Chairman Axel Lehmann called the sale “a clear turning point.”

SAD DAY?

“It is a historic, sad, and very challenging day for Credit Suisse, for Switzerland, and for the global financial markets,” Lehmann said. Lehmann added that the focus is now on the future and, in particular, on the 50,000 Credit Suisse employees, 17,000 of whom are in Switzerland.

Colm Kelleher, the UBS chairman, hailed the “enormous opportunities” that emerged from the takeover and highlighted his bank’s “conservative risk culture.”

It was seen as a subtle swipe at Credit Suisse’s reputation for more swashbuckling, aggressive gambles searching for bigger returns.

However, Kelleher conveniently overlooked past scandals at UBS and that the Swiss government once bailed it out after being forced to write down $50 billion linked to U.S. mortgage-backed securities in 2008.

UBS later returned to a more healthy financial situation as it tried to regain its historical reputation as a reliable wealth management institution.

Kelleher said the combined UBS Credit Suisse group would create a wealth manager with over $5 trillion in total invested assets.

Sunday’s move came after shares of Credit Suisse and other banks plunged in recent days after the sudden collapse of two vital regional banks in the United States.

U.S. TROUBLES

Before Sunday’s announcement in Switzerland, the U.S.-based banks Silicon Valley Bank (SVB) and Signature Bank failed with enormous speed. They became cases of classic bank runs, in which too many depositors withdraw their funds from a bank at the same time.

The failures at SVB and Signature were two of the three biggest in U.S. banking history, following the collapse of Washington Mutual in 2008, and were felt worldwide.

With turmoil spreading, Switzerland, known for hosting several of the world’s revered financial institutions, rushed to prevent further infection of the global banking system ahead of the opening of global markets.

Soon after the Swiss rescue of Credit Swiss, the world’s largest central banks tried to reassure consumers.

In a global response not seen since the height of the COVID-19 pandemic, the Federal Reserve said it had joined with central banks in Canada, England, Japan, the European Union, and Switzerland to enhance market liquidity.

Their actions include daily access to a lending facility for banks looking to borrow U.S. dollars if they need them, a practice widely used during the 2008 financial crisis.

Three months after Lehman Brothers in the U.S. collapsed in September 2008, such swap lines had been tapped for $580 billion.

COVID-19 PANDEMIC

Added swap lines were also rolled out during market turmoil in the early stages of the COVID-19 pandemic in March 2020.

There were mixed market reactions, with the United States S&P 500 futures index up 0.51 percent in early trading while the technical-heavy Nasdaq futures rose 0.66 percent.

But New Zealand dipped at the open, and Australian shares were set to open down. Crude futures edged lower, and even the safe-haven dollar lost ground against its peers.

As markets prepared to open in Europe, investment research firm Third Bridge already made comparisons to the financial crisis in 2008. “Today is one of the most significant days in European banking since 2008, with far-reaching repercussions for the industry,” said Third Bridge analyst Max Georgiou.

“These events could alter the course of not only European banking but also the wealth management industry more generally,” he added.

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