After the laboriously negotiated takeover of the ailing Credit Suisse (CS) by the major Swiss bank UBS, there is still unrest on the financial markets. The main Asian stock exchanges were mostly down on Monday. The leading German index, the DAX, also started trading at a discount. In particular, the shares of Deutsche Bank and Commerzbank lost significantly in value.
Both the billion-euro deal in Switzerland and the measures taken by several central banks to provide liquidity to the financial system did little to counter fears of a banking crisis. The mood for banks remains shaky, investors withdrew further. The euro initially barely reacted on Monday morning. Gold, on the other hand, rose significantly: The ongoing uncertainty on the financial markets pushed the price of gold above the US$ 2,000 mark for the first time in a long time on Monday.
Uncertainty was caused by the fact that the holders of Credit Suisse equity-like bonds were to lose all of the money they had invested in the course of the takeover. This involves so-called AT1 bonds worth 16 billion Swiss francs (16.2 billion euros), as Credit Suisse and the financial regulator Finma announced on Sunday.
However, Deutsche Bank sees itself hardly affected by this. A spokesman said on Monday that the DAX group was “almost zero” involved in these Credit Suisse bonds. According to a spokesman, Commerzbank has not invested any money at all in the Swiss rival’s AT1 bonds.
UBS takes over the smaller local rival for three billion francs (a good 3 billion euros). In addition, it is responsible for losses of up to five billion francs. There is also a state loss guarantee of CHF 9 billion and liquidity commitments of up to CHF 200 billion.
The Swiss National Bank (SNB) is supporting the transaction with liquidity assistance and granting the banks a loan of up to CHF 100 billion. In addition, the SNB could grant Credit Suisse a liquidity assistance loan of up to CHF 100 billion secured by a default guarantee from the federal government. The Swiss government promised UBS a guarantee of CHF 9 billion. Other central banks welcomed the measures.
A takeover of the second largest Swiss bank Credit Suisse by the larger UBS is the most significant bank merger in Europe since the financial crisis 15 years ago. It means the end for the 167-year-old Credit Suisse, whose headquarters are opposite its competitor UBS on Zurich’s Paradeplatz. This was preceded by a marathon of negotiations in which the two banks and top representatives from politics and the supervisory authorities took part. State and supervisory authorities were concerned with preventing a wildfire.
The Swiss government in Bern was under considerable pressure to stabilize the situation and support Credit Suisse. Because Credit Suisse is one of the world’s largest asset managers and is one of the 30 globally systemically important banks whose failure would shake the international financial system.
Swiss President Alain Berset said “the Federal Council is convinced that the takeover is the best solution to restore confidence”. Credit Suisse has lost customer confidence and liquidity had to be guaranteed. The transaction is important for the stability of the Swiss financial center, it said. SNB President Thomas Jordan emphasized that reputation is central to the Swiss economy.
Finance Minister Karin Keller-Suter said the federal government had given a guarantee of CHF 9 billion to absorb Credit Suisse risks. “The taxpayers have little risk” – any other scenario would have incurred more costs. You have a private partner and a solid bank that is taking over Credit Suisse. The minister emphasized that it was not a state rescue. The federal government only gave a guarantee.
UBS Chairman of the Board of Directors Colm Kelleher spoke of a huge opportunity for UBS. The combination of both banks strengthens the position. The Swiss Financial Market Supervisory Authority (Finma) welcomed the takeover solution and the measures taken by the federal government and the Swiss National Bank (SNB). At Credit Suisse there was a risk of insolvency, even if the bank was still solvent, it said.
Credit Suisse had recently suffered from a significant loss of investor confidence. The share price had fallen to a record low after the bank’s largest investor ruled out providing further capital and the institution continued to struggle with cash outflows.
According to UBS, the merger to form a new industry giant will create a financial institution with more than $5 trillion in assets under management. No statements could be made about possible job cuts, it said on Sunday evening. Together, the two institutes employ around 120,000 people.
The balance sheet total of UBS with more than 72,000 employees amounted to the equivalent of 1,030 billion euros in 2022, and that of Credit Suisse with a good 50,000 employees to the equivalent of 535.44 billion euros. UBS had made a profit of $7.6 billion in 2022 (currently $7.07 billion). Credit Suisse, on the other hand, reported a loss of CHF 7.3 billion (EUR 7.4 billion).
The Credit Suisse case threatens the CoCo bond market
Credit Suisse Group’s emergency merger with UBS Group wiped out the crisis bank’s riskiest bonds. Investors in the quarter-trillion-dollar market for similar European bank debt should be concerned.
AT1 bonds – also known as contingent convertible bonds or CoCos – were introduced after the 2008 financial crisis to shift banking risk from taxpayers to bondholders. They became a popular investment product that money managers and banks, including Credit Suisse, touted to clients as a relatively safe way to increase returns on bond portfolios.
“What’s shocking is that it looks like equity holders are recovering better than Tier 1 bond holders,” said Justin D’Ercole, co-founder of ISO-mts Capital Management, a fund focused on bank paper concentrated. Losses resulting from the write-down are likely to prompt retail and institutional investors to sell similar securities from other European banks, D’Ercole said.
Financial turnaround: merger of UBS and CS exacerbates the problem
According to the Finanzwende organization, the merger of the Swiss banks UBS and Credit Suisse exacerbates the “too big to fail” problem. Rather, far-reaching financial market reforms are needed to ensure that the recent turbulence in Switzerland and the USA does not worsen.
UBS had previously taken over the ailing Credit Suisse for CHF 3 billion and the Swiss National Bank provided CHF 100 billion in liquidity support for both banks.
“This bailout creates new problems. 2008 actually taught us that we shouldn’t have banks that are too big. With this merger of two banks that were already systemically important before, we get an even bigger player that must certainly not go bankrupt,” said the board of the citizens’ movement Finanzwende, Gerhard Schick. This solution is therefore not sustainable and only exacerbates the problem.
Overall, according to Schick, the failure of Credit Suisse is a wake-up call to finally push through important financial market reforms. Much higher capital buffers are needed at banks, a European resolution and deposit insurance authority with significantly more powers and a separation of commercial banks and investment banking so that you don’t constantly get into these emergency situations. Germany must also act.
“We have to stop convincing ourselves that the events in the USA and Switzerland are unthinkable in this country – that’s simply not true. We need concrete political measures instead of vague reassurances,” said Schick.
According to Credit Suisse, government adviser warns of bank run scenarios
The economist Jens Südekum, a member of the scientific advisory board of the Federal Ministry of Economics, has warned of bank run scenarios in Germany after the takeover of Credit Suisse by the UBS bank. In an interview with the Bild newspaper, he also said that the unlimited state security in the USA after the turbulence at Silicon Valley Bank could be interpreted by banks as license to gamble.
Südekum said that in the event of a “bank run panic” like that at Credit Suisse, things could also get tight for German banks. This danger exists when the market situation is nervous. “Should a large bank in Germany get into trouble, the ECB would be ready to secure liquidity.” The interest rates are also problematic: “If, for example, loans from mortgage lenders collapse because there is no money for the increased interest rates, a rescue operation would have to come,” said the Düsseldorf economist.
With regard to the question of whether there could be a new financial crisis, Südekum said that the contagion effects of 2008 no longer exist. The equity ratios are better, there are no bad loans. The unsecured deposits at Silicon Valley Bank were huge. At Credit Suisse, too, it was “certainly no coincidence” that the problems arose right now.
But Südekum also said that in the US the deposit limit is $250,000. “An unlimited guarantee was called for during the rescue, which shakes stability. If word gets around, banks have license to gamble,” said Südekum.
Investors exit Credit Suisse after takeover
Investors are dumping Credit Suisse shares from their portfolios after it was taken over by rival UBS.
The titles of the major Swiss bank on Monday are temporarily indexed 59.77 percent weaker at 0.75 francs in Swiss trading. UBS shares are recently indexed 11.69 percent lower at CHF 15.11.
In a rescue operation, UBS takes over the badly hit Credit Suisse for three billion Swiss francs. This corresponds to CHF 0.76 per Credit Suisse share after the shares closed at CHF 1.86 on Friday. In addition, UBS is responsible for losses of up to five billion francs. The Swiss National Bank (SNB) and the government are supporting the deal with liquidity aid in the hundreds of billions.
ZURICH/BERN/FRANKFURT/BERLIN (dpa-AFX / Reuters / Dow Jones Newswires)
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