Credit Suisse takeover, central bank action calm jittery markets

WORLD  20 March 2023 - 11:29

Moves by authorities to avert a global banking crisis lifted market confidence on March 20 as investors welcomed a historic Swiss-backed acquisition of troubled Credit Suisse by UBS Group and emergency dollar liquidity from top central banks.

In a package orchestrated by Swiss regulators on Sunday, UBS Group AG (UBSG.S) will pay 3 billion Swiss francs ($3.23 billion) for 167-year-old Credit Suisse Group AG (CSGN.S) and assume up to $5.4 billion in losses, Reuters reports.

Major central banks, faced with the risk of a fast-moving loss of confidence in the financial system, also scrambled on Sunday to bolster the flow of cash around the world with a series of coordinated currency swaps to ensure banks have the dollars needed to operate.

The shotgun Swiss banking marriage is backed by a massive government guarantee, helping prevent what would have been one of the largest banking collapses since the fall of Lehman Brothers in 2008.

On Monday, there were no apparent signs of disruption at Credit Suisse's operations, while financial authorities in Asia said they were monitoring market conditions but saw no immediate distress.

Financial markets initially staged a modest relief rally in Asian trade but were wary about a range of risks including contagion, the fragile state of U.S. regional banks, and moral hazard.

"Policy makers will be hoping that the weekend's UBS buyout of troubled Credit Suisse will draw a line under recent market stresses," said Brian Martin, ANZ head of G3 economics in London.

Pressure on UBS helped seal Sunday's deal.

"It's a historic day in Switzerland, and a day frankly, we hoped, would not come," UBS Chairman Colm Kelleher told analysts on a conference call. "I would like to make it clear that while we did not initiate discussions, we believe that this transaction is financially attractive for UBS shareholders," Kelleher said.

UBS CEO Ralph Hamers said there were still many details to be worked through.

"I know that there must be still questions that we have not been able to answer," he said. "And I understand that and I even want to apologise for it."

In a global response not seen since the height of the pandemic, the Fed said it had joined central banks in Canada, England, Japan, the EU and Switzerland in a coordinated action to enhance market liquidity. The European Central Bank vowed to support euro zone banks with loans if needed, adding the Swiss rescue of Credit Suisse was "instrumental" in restoring calm.

On March 20, Credit Suisse's banking operations appeared to be running business as usual at its major offices in Asia.

Monetary authorities in Singapore and Hong Kong, where Credit Suisse hosts large regional offices, separately said the Swiss bank's business continued without interruption.

Bloomberg News reported Credit Suisse had urged its staff to go to work and assured them that bonuses would still be paid this week.

UNRESOLVED ISSUES

Problems remain in the U.S. banking sector, where bank stocks remained under pressure despite a move by several large banks to deposit $30 billion into First Republic Bank (FRC.N), an institution rocked by the failures of Silicon Valley and Signature Bank (SBNY.O).

On March 19, First Republic saw its credit ratings downgraded deeper into junk status by S&P Global, which said the deposit infusion may not solve its liquidity problems.

U.S. bank deposits have stabilized, with outflows slowing or stopping and in some cases reversing, a U.S. official said on Sunday, adding the problems of Credit Suisse are unrelated to recent deposit runs on U.S. banks and that U.S. banks have limited exposure to Credit Suisse.

The U.S. Federal Deposit Insurance Corp (FDIC) is planning to relaunch the sale process for Silicon Valley Bank (SIVB.O), with the regulator seeking a potential breakup of the lender, according to people familiar with the matter.

There are also concerns about what happens next at Credit Suisse and what that means for investors, clients and employees.

In a memo to employees that was seen by Reuters and referenced talking points with clients, Credit Suisse said that once the takeover is complete wealth management clients may want to consider moving some assets to another bank if concentration was a concern.

The deal will also make UBS Switzerland’s only global bank and the Swiss economy more dependent on a single lender.

"The Credit Suisse debacle will have serious ramifications for other Swiss financial institutions. A country-wide reputation with prudent financial management, sound regulatory oversight, and, frankly, for being somewhat dour and boring regarding investments, has been wiped away," said Octavio Marenzi, CEO of Opimas, in Vienna.

UBS chairman Kelleher told a media conference that it will wind down Credit Suisse's investment bank, which has thousands of employees worldwide. UBS said it expected annual cost savings of some $7 billion by 2027.

The Swiss central bank said Sunday's deal includes 100 billion Swiss francs ($108 billion) in liquidity assistance for UBS and Credit Suisse.

Credit Suisse shares lost a quarter of their value last week. The bank was forced to tap $54 billion in central bank funding as it tried to recover from scandals that undermined confidence.

Under the deal with UBS, some Credit Suisse bondholders are major losers. The Swiss regulator decided that Credit Suisse bonds with a notional value of $17 billion will be valued at zero, angering some of the holders of the debt who thought they would be better protected than shareholders in the takeover deal announced on Sunday.

($1 = 0.9280 Swiss francs)

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