The bidding war for the battered Swiss investment bank Credit Suisse seems to be over. UBS, also Swiss, led by Dutchman Ralph Hamers, would like to buy the bank for more than $ 2 billion. Credit Suisse thought an earlier offer of $1 billion was too low. Why is Credit Suisse so important? Five questions.
How did the problem arise?
Not in Switzerland. Smaller US banks accelerated into the red in recent weeks. The Silicon Valley Bank (SVB) wanted to issue $2.25 billion in new shares, but failed to sell the shares in the market after a loss of $1.8 billion. Thursday night it reported its troubles. The share price plummeted, money poured out of the bank. The US government guaranteed customer deposits and accounts up to $250,000 in value. On Friday night, however, the California Department of Financial Protection and Innovation took over. On Sunday, the US government acted as a captain in the market: all customers were rescued overnight, even for amounts above $250,000. But bondholders had to bleed. Concerns about the state of the banks, partly intertwined with crypto coins, also hit the bank First Republic and Signature Bank amidships in a short time.
“With such quick surprises, investors immediately start looking for the next weak link in the financial markets. They have learned from the banking and credit crisis of 2008. They are now turning their attention to Credit Suisse,” says Harald Benink, professor of banking and finance at Tilburg University.
According to the sources against the Financial Times, negotiations are underway for a full or partial takeover of Credit Suisse by UBS, with former ING CEO Ralph Hamers as CEO. BlackRock, the world’s largest asset manager founded by Larry Fink, would make an alternative offer to the Financial Times, according to five sources. Although BlackRock denied such a move on Saturday.
According to the sources, the Swiss central bank and the financial regulator Finma want a quick breakthrough, preferably among the Swiss. Such a purchase can be handled quickly within your own regulations. In this way, the Swiss want to regain confidence and support stability in the financial market. The European Central Bank is also watching; its oversight board met unexpectedly on Friday.
A large Swiss bank. They’re decent, aren’t they?
Yes. Credit Suisse is also a completely different type of bank than Silicon Valley Bank. But broad-based investment bank Credit Suisse had a string of affairs, including allegations of merchant fraud. And huge losses. His position has been seriously weakened. Successive interventions, changes of directors and restructuring to separate high-risk areas did not help sufficiently.
The Saudi National Bank, a major shareholder in Credit Suisse, also indicated last week that it would not contribute to additional financing. That intensified the turbulence, the bank briefly went into a free fall.
This week, the Swiss financial services company employing 22,000 people announced the layoff of 9,000 employees. After the collapse of the three US banks, the Swiss central bank made an emergency loan of €50 billion available to Credit Suisse. That is a huge amount, but the market thought that was insufficient: the following day the share fell 8%. This year, the share of the major power from Zurich has already lost 36%. The problem seems structural: in five years time 85% of the price evaporated. In 2022, it generated $14.5 billion in revenue, up from $20.6 billion two years earlier.
But how strong are UBS and BlackRock?
Strong. BlackRock posted $5.2 billion in profit last year and manages $8.6 trillion in assets. It is invested in almost all major Dutch companies, but also our pension funds.
The Dutchman Ralph Hamers, ex-ING, had delivered a profit of $7.6 billion in 2022. However, Credit Suisse lost $7.2 billion that year. Due to particularly good performance and turnover last year, CEO Hamers received a bonus increase to € 12.3 million, competitor Ulrich Körner was left behind at Credit Suisse. But in recent weeks, all banks have been in dire straits due to the bankruptcies, their shares have fallen sharply.
Reuters reported that at least four major banks such as Deutsche Bank and Société Générale have scaled back their trade transactions with Credit Suisse.
Why the rush?
“Financial markets are very nervous. If more customers withdraw their money, you run the risk of one bank run and contagion to the entire financial market, as we know it from 2008. You get a domino effect, in which the next weaker link is tested by the market every time,” says Professor Benink.
Economists also see that the safety net system for banks has turned out to be very fragile in a few days. It is therefore of utmost importance to supervisors to quickly come up with strict measures to prevent that panic, according to the economist. “Confidence in banks must return. It is not for nothing that the American authorities immediately intervened, unlike during the banking crisis of 2008 with mortgage investments,” he says.
“But because Credit Suisse and UBS are such big banks, intertwined with the financial markets in many countries, it becomes very difficult to oversee the consequences of a bid. Everyone is working on that now. That should be clear before Monday morning.”
Otherwise, private individuals as well as large investors will withdraw their money. Also other banks that, for example, have to provide loans to companies. “That is all still hypothetical,” emphasizes Benink. “But regulators are doing everything they can to regain that trust. It is then almost inconceivable that there will be no concrete solution on Monday. Also about strengthening equity. Otherwise you would get that bank run, with consequences worldwide.”
Reuters reported that UBS will only enter into the acquisition if the Swiss government guarantees. The $6 billion that UBS would demand from the government is needed to provide Credit Suisse with sufficient liquidity and to cover the costs of litigation and the restructuring of the company. If UBS has taken over Credit Suisse, the liquidity support of €50 billion will probably no longer be necessary, says Benink.
What does this mean for the Netherlands?
Not much for consumers. De Nederlandsche Bank (DNB) has a deposit guarantee scheme. Even if a bank were to fail, the balances there are guaranteed up to €100,000. After the credit crisis of 2008, the central bank, led by Klaas Knot, prepared another series of emergency measures. This includes support packages to the banks. They must maintain a ratio of 5 to 6% for the ratio between assets and equity.
Benink: “If it comes down to it, following the American example, this limit of €100,000 could also be set aside. Credit Suisse is a so-called systemic bank, with countless activities that are widely branched all over the world. UBS is also a global player. Putting it together is very complex. If problems do arise there, there could be an outflow of large deposits.”
The banks may then be forced to sell their bonds to replenish their liquidity reserves. “Then equity is pressed, which then results in losses that affect equity,” says Benink. “The banks have to strengthen their own capital in the event of another weakening. Which will be difficult in a crisis of confidence in banks. This threatens to create a vicious circle. When Fortis fell in September and October 2008, you saw that its capital buffers came under considerable pressure and nationalization by the government was necessary,” he compares. “Because Credit Suisse is so big, the government will have to intervene in the event of a fall. And that would affect financial markets all over Europe.”