After high speculation from financial risk experts, Switzerland’s second largest bank, Credit Suisse, met its demise last week as it was forced to merge with the country’s largest bank, UBS.
Swiss officials announced this upheaval in the banking industry, as UBS agreed to pay a staggering 3 billion Swiss francs (£2.6 billion) to acquire 167-year-old Credit Suisse. The deal, finalised on March 17, also includes UBS assuming up to £4.4 billion in losses.
Credit Suisse shares plummeted by nearly 30% to 1.6 Swiss francs (£1.42), before slightly recovering to a loss of 24% at 1.7 Swiss francs (£1.51) at the end of trading on the SIX stock exchange. The bank's stock hit its lowest point, down over 85% since February 2021. Credit Suisse stock has since halved to 0.84 CHF (£0.75) as of March 23.
"With the takeover of Credit Suisse by UBS, a solution has been found to secure financial stability and protect the Swiss economy in this exceptional situation," the Swiss central bank said.
The agreement, backed by the Swiss Federal Department of Finance, the Swiss National Bank, and the Swiss Financial Market Supervisory Authority has stabilised financial turmoil and raised its key interest rates today. The merger and interest rate spike are a move that limited the potential for a ‘contagion effect’ that could spread through the banking sector, raising fears reminiscent of the 2008 global recession.
“An insolvency of Credit Suisse would have had severe consequences for national and international financial stability and for the Swiss economy,” said Thomas Jordan, chairman of the Swiss central bank’s governing board.
The agreement sent shockwaves through the global financial sector and induced significant turbulence in financial markets across the globe. FTSE, the European Central Bank and NASDAQ experienced small falls since Credit Suisse’s liquidity issues last week. Experts have however noticed slow and steady rises since then and do not expect the Credit Suisse problem to have triggered any long-term financial disaster.
Credit Suisse’s potential collapse comes just a week after American Silicon Valley Bank (SVP) faced insolvency, the largest of any bank since the 2008 crisis.
Silicon Valley Bank’s UK operations were managed under the close eye of the UK government, when a last-minute deal for HSBC to buy SVB UK for the price of £1 was achieved and in the process sparing the losses of thousands of British tech startups and investors.
UBS has since updated its customers and stakeholders on the Credit Suisse merger on its website. Responses to questions on the merger remain strikingly vague, however.
Further concern of insolvency risks have been put to some ease as the Neue Zürchner Zeitung informs that the Swiss government has granted UBS a guarantee of CHF 9 billion to take over potential losses from certain assets.
It remains to be seen how the integration of Credit Suisse's operations and employees into UBS will unfold, and how the new entity will compete with other major players in the global banking industry. Additionally, UBS will need to navigate potential regulatory hurdles and address any concerns from customers, employees, and shareholders. It will also be interesting to see how UBS leverages Credit Suisse's expertise and assets to strengthen its own business and expand its offerings. Only time will tell what the future holds for the new Swiss megabank.
Regarding the bank’s impact in the UK, The Bank of England has said banks here are “safe” and has prevented fears of insolvency contagion. It further added that the UK banking system was "well capitalised and funded and remains safe and sound".
In a bid to keep cash available through the global financial system, six central banks, including the Bank of England, also announced they would boost the flow of US dollars through the global financial system.
UBS Chairman Colm Kelleher has stated that it is too early to see what impact the merger will have for the 5000 UK jobs in Credit Suisse and added that UBS is closely monitoring the situation and committed to supporting its clients and employees during this period of transition.
Given the uncertainty surrounding the future of the industry in the post-pandemic era, trust in the Swiss financial sector is at a considerable low. With the rise of global interest rates, Credit Suisse however cannot be taken fully accountable for its decision making in the ever-evolving global economy. The bank has however put itself in tricky waters for the last decade after it had to pay a whopping $2.6 billion in penalties in 2014 to settle tax charges ordered by the US government.
Back in 2010, during the Obama inauguration, a bill was introduced that imposed a 30% tax on payments originating in the US for foreign banks that failed to disclose their account holders or transaction details. This measure had a significant impact on Swiss banks, which had long upheld their strict bank secrecy laws, resulting in hefty penalties for non-compliance.
Swiss banks are once again facing intense scrutiny from the global media and operating in a progressively complex regulatory environment, as they grapple with the aftermath of the Credit Suisse merger and strive to regain confidence in the Swiss financial industry. Despite the challenges, Swiss officials and industry leaders remain optimistic about the country's ability to weather the storm and emerge stronger in the long run. Time will tell whether their optimism is well-founded or if further upheavals in the banking industry are on the horizon.