Has a full-scale banking crisis been avoided? UBS has announced a takeover of rival Credit Suisse for just over $3 billion – half of its valuation on Friday and a tenth of its valuation just two years ago. The deal, timed to conclude before the Asian markets opened, is intended to stop any domino effect that might have been created had Credit Suisse folded this week and started to call into question the viability of other banks. Reflecting the announcement, UBS shares fell 14 per cent in early trading.
Credit Suisse calls it a ‘merger’, UBS calls it a ‘takeover’ but it can also be called a ‘bailout’. The deal involves $9 billion of contingency credit from the Swiss government, pre-empting costs UBS will incur from the deal, and Swiss National Bank is stumping up $100 billion of liquidity support. This doesn’t happen in normal takeovers. Most strikingly, the ‘AT1’ bonds that Credit Suisse had issued (and had been valued at $17 billion) have been wiped out. This is unlikely to have happened unless the regulators regarded the bank as unviable.
If Credit Suisse was unviable (in spite of all the assurances to the contrary) it raises an obvious question: what else have the regulators missed? Just a few days ago, there was some confidence that Credit Suisse might recover. Despite its stocks hitting a new record low on Wednesday, they had started to rebound, after the bank agreed to a $50 billion bailout from the Swiss National Bank to help get its finances in order. Comments from Credit Suisse’s largest shareholder, the Saudi National Bank, which triggered jitters were also better explained. The Saudis had suggested they wouldn’t put anymore capital into Credit Suisse, mainly due to regulatory hurdles.
Credit Suisse’s long-standing reputation for poor management could not survive the regional banking crisis that had been sparked in the United States, which included the collapse of Silicon Valley Bank. Credit Suisse shared plunged again on Friday and its value deteriorated significantly over the weekend: estimated at $8 billion on Friday, but bought for nearly $5 billion less within 48 hours. (The bailout has left the Saudis nursing a $1 billion loss.)
The relief from UK authorities has been audible, with the Bank of England praising the ‘comprehensive set of actions’ in Zurich. It’s putting the UK’s own banking deal – which allowed HSBC to acquire the UK arm of SVB for £1 – look impressive, as there were no taxpayer guarantees needed.
But will UBS’s takeover bring fears of a banking crisis to an end? The brutal decision to let Credit Suisse AT1 bonds collapse (Ross Clark has the details here) will make investors wonder how much such bonds (a feature of the post-crash financial landscape) are really worth. We can expect the AT1 bonds issued by other banks (there’s an almighty $275 billion of them in all) to take a beating today as jitters continue. Credit Suisse may be dismissed as a ‘one-off’ problem, as bad investments and scandals have plagued the bank for years. But in truth, fast-changing economic landscapes – mainly the return of normal interest rates – are exposing lots of problem areas.
So far the assumption seems to be that these vulnerabilities can still be managed – the European Central Bank pushed on with another hike to its base rate last week, even in the thick of the Credit Suisse concerns. But there are plenty signs of deeper nerves. Six central banks, including the US Federal Reserve and the Bank of England, have just announced ‘coordinated action’ ‘to enhance the provision of liquidity via the standing US dollar liquidity swap line arrangements’ – which allows a country to trade its own currency for equivalent dollars. The plan is to make sure everyone has faster access to the dollar (daily, instead of weekly). The stock-up is supposed to help keep banks confident that they can continue to lend (to individual households as well as to businesses), despite all the uncertainty in the sector. Which will make investors think: why do that, if there’s nothing else to worry about? There are big questions here for the regulators. They didn’t see the LDI crisis coming last year, nor did they see the US regional bank crisis coming and were telling us only recently that Credit Suisse was all okay.
The assumption behind the bailout is that the fast collapse of one of the 30 most important banks worldwide will keep investors’ eyes laser-focused on the sector to see what else is wobbling: putting pressure on not just the regional banks, but the international ones, to prove that their houses are in order.
Comments