What comes as a major calming effect for the global banking system and stock markets world over, Switzerland’s largest bank UBS has stepped in to save rival Credit Suisse, offering $3.25 billion to acquire it in a deal backed by regulators. Swiss authorities have reportedly pushed UBS to take over its smaller rival after a plan for Credit Suisse to borrow up to 50 billion francs (USD 54 billion).

 

The genesis of the Credit Suisse Crisis

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Credit Suisse's shares touched all-time low last week as a top investor in the embattled Swiss bank said it would not be able to provide any more cash due to regulatory restrictions.
On Tuesday, 14 March, Credit Suisse stated in their 2022 annual report that the bank has identified some “material weakness” in its internal controls over financial reporting at a time when the bank is trying to recover from a string of scandals. According to the bank, the scandals have undermined the confidence of investors and clients. Customer outflows in the fourth quarter rose to more than 110 billion Swiss francs ($120 billion).

The root cause of the Credit Suisse crisis could be traced back to March 2021, when the bank announced that it would close and liquidate several investors funds, worth $10 billion, provided to another financial services company, Greensill Capital. Greensill declared insolvency in March 2021. Immediately after this, investors faced a massive loss close to $3 billion.

Just a year later in February 2022, tensions among the investors amplified as there was a massive leak of over 30,000 of Credit Suisse's clients, which revealed over $100 billion in wealth held by people who had profited from "torture, drug trafficking, money laundering, corruption and other serious crimes," reported The Guardian.

 

Credit Suisse crisis shakes stock markets

 

Shares of Credit Suisse and other banks plunged this week after the failure of two banks – SVB & Signature bank - in the US sparked concerns about other potentially shaky institutions in the global financial system.

 

Swiss FM statement on Credit Suisse crisis

 

Finance Minister Karin Keller-Sutter stated that bankruptcy for Credit Suisse could have caused "irreparable economic turmoil" and "huge collateral damage" for the Swiss financial market, and would have caused the "risk of contagion" for other banks, including UBS itself. As pointed out by Sutter, the takeover has "laid the foundation for greater stability both in Switzerland and internationally".

 

Who’s backing ubs to buy Credit Suisse and why?

 

On its own, it was a tall ask for even UBS to buy out Credit Suisse and it needed an additional guarantor and hence enters, the Swiss National Bank.

After the Credit Swiss crisis, there has been a growing panic among global investors and many investors dumped its shares and bonds following the collapse of several smaller US lenders.  A liquidity backstop by the Swiss central bank was a much-needed move to arrest the declines. 

 

What Swiss President Alain Berset said

 

The deal was “one of great breadth for the stability of international finance," said Swiss President Alain Berset as he announced it on Sunday night. "An uncontrolled collapse of Credit Suisse would lead to incalculable consequences for the country and the international financial system." The Federal Reserve and Treasury Department welcomed the deal, as did the European Central Bank.

 

Is the crisis over? Maybe not, here’s why

 

Economists have pointed out that the rigorous Fed rate hikes have resulted in the latest economic crisis like SVB crisis and Credit Suisse. The deposit flight brought down Silicon Valley Bank and Silvergate Capital Corp. happened as the cost of funding for banks had finally started to rise. Savers in the US and elsewhere didn’t react to higher interest rates for months in 2022, but they increasingly began to look for better returns on their cash late last year. However, it is unlikely that Fed will slow down its rate hike mechanism, rather it is expected that in the upcoming meet, there will again be a rate hike of 25 bps.

 

Also Read: 5 reasons why Credit Suisse crisis won't have any major impact on India's banking system: Experts decode