Banking giant UBS to buy the collapsing Credit Suisse for Market stability
By The Headlines, March 19, 2023 | 10:16 PM
UBS plans to buy Credit Suisse in a bid to mitigate any further destabilizing effects in the banking sector. Swiss president Alain Berset made the announcement on Sunday night.
Swiss president Alain Berset mentioned that the agreement was an important step towards financial security not just in the country, but around the world. Without it, a possible collapse of Credit Suisse could potentially have overwhelming effects on Switzerland and international finance as a whole.
The Financial Stability Board, an international agency that oversees the global financial system, has tapped Credit Suisse as one of the world's ‘globally systemic important banks’.
Regulators fear that the unbridled failure of this entity would create shock waves in the financial system just as Lehman Brothers did 15 years ago.
Credit Suisse is evaluated as an assent of a value of 1.4 trillion US dollars.
Last week's bank failures put the US government in a frenzy, prompting them to take utmost measures to prevent additional panics. This Sunday, they are holding a news conference to address the situation and provide further information.
Global financial markets are on edge as Credit Suisse's share price has begun to decline drastically this week.
Credit Suisse, established in 1856, received a 54 billion Swiss francs loan (£47 billion) from the Swiss National Bank to help its stock price temporarily rise. However, it wasn't enough to stop customers from withdrawing their deposits as reported by various news sources.
Despite this, Credit Suisse's challenges are specific and different from the vulnerability that led to Silicon Valley Bank and Signature Bank being rescued by the FDIC and Federal Reserve. These institutions had gone through a big rescue effort as a result of their failures.
Consequently, the decline of these institutions does not necessarily mean the onset of a 2008-style financial crisis.
It has been quite a tumultuous week for the bank, especially on Wednesday when its stocks touched an all-time low after its biggest shareholder, Saudi National Bank, refused to invest more so as to comply with regulatory guidelines which state that owning more than 10% of the company's shares is against regulations.
On Friday, the share price of the stock fell 8% to 1.86 francs (£1.65) on the Swiss exchange. This has been a trend for quite some time now; over the past 12 years, it has seen a drastic change in value - going from 80 francs in 2007 to its current price point.
On Tuesday, Credit Suisse revealed that certain weaknesses in their financial reporting had been identified which ignited the worries that another financial institution could follow 'the domino effect'. This led to its current difficulties.
Despite being smaller than UBS, Credit Suisse still holds considerable sway in the international financial markets. It has a staggering US$1.4 trillion (£1 trillion) worth of assets under its management.
This firm's network of global trading desks, wealth management services for the affluent, and expertise in corporate mergers & acquisitions make it a leading adviser for companies worldwide. It is remarkable that Credit Suisse managed to remain solvent during the 2008 financial crisis without the need for assistance from a governmental body, while UBS did require it.
On Thursday, the European Central Bank decided to raise interest rates significantly despite the current banking difficulties, in an effort to tackle rising inflation. Moreover, they cited that Europe's banking sector is “resilient” and financially sound.
Christine Lagarde emphasized that the banking system has significantly improved since the financial crisis in 2008 due to more stringent government regulation. As a result, banks are now in a much better position than they were back then.
Swiss bank UBS has been trying to raise money from investors and create a new plan to tackle its various problems, such as hedge fund losses and changes to the executive team, as well as its infamous spying scandal.