- Investment Insights
- 2 minute read
Switzerland’s largest bank, UBS, is paying 3 billion Swiss francs ($3.2bn) in shares for Credit Suisse, its Swiss rival. In addition the Swiss authorities have provided a number of government guarantees and extra liquidity provisions to UBS to cover any losses it might incur in selling off unwanted divisions of Credit Suisse or to cover any other problems not evident on purchase.
Why has this happened?
Credit Suisse’s profitability has been declining for many years and a succession of missteps and changes in senior management all led to a share price falling over 90% from its 2007 highs. Last week their largest shareholder, the Saudi National Bank, indicated it wouldn’t be providing any more financial support, and that indirectly led to further share price falls and further deposits leaving the bank. The Swiss National Bank and financial regulator stepped in and provided a c$50bn life line.
But this was just a temporary solution to an unfolding crisis and so over the weekend other options were sought, one of which was the acquisition of all of Credit Suisse by its rival which was announced to the markets on Monday morning.
Put simply, Credit Suisse was a global bank which regulators considered ‘too big to fail’.
Unusually, in the acquisition of Credit Suisse a tier of bond holders called Additional Tier 1 (AT1s), supposed to absorb losses in times of stress, were wiped out to the tune of $17bn ahead of any shareholders. Normally shareholders lose their equity in the company first and bond holders have higher claims on whatever assets are left.
This reversal of the norm – agreed by the Swiss regulators – worried all the other AT1 bond holders in banks across Europe and led on the opening of the European market to bank shares selling off further. At the time of writing, this sell-off has reversed and we think it likely that over the next few days central authorities and regulators alike will issue new guidance or a framework that clarifies how these bonds are to be dealt with in future.
UBS shareholders may also be miffed as they had no vote on the Swiss regulator hastily pushing through this merger.
What happens next?
As UBS senior management pore over the books of Credit Suisse surprises may emerge but sufficient liquidity has been provided (and more would be forthcoming) to ensure that UBS emerges as an even stronger player within the global banking industry. UBS’s takeover of Credit Suisse will create a much larger bank with more than $5 trillion dollars of invested assets.
If the authorities and regulators can demonstrate to markets that they will counter confidence issues in any bank by taking swift action, then this run of bank crises will peter out and this, we still think, is the most likely scenario.
Also this week both the US Federal Reserve and Bank of England have meetings to decide whether to hike interest rates. The banking crisis may mean that the upward path of interest rates is halted or at least reduced compared to forecasts of a month ago, but it is these decisions that matter more to the path of the global economy and how different asset classes and how our clients’ portfolios perform.
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