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Swiss banking giants combine to quell growing global bank crisis

The Washington Post logo The Washington Post 3/19/2023 Abha Bhattarai, Rachel Siegel
The logo of Credit Suisse is pictured in front of the Swiss Parliament Building, Bern, Switzerland, March 19, 2023. (REUTERS/Denis Balibouse) © Denis Balibouse/Reuters The logo of Credit Suisse is pictured in front of the Swiss Parliament Building, Bern, Switzerland, March 19, 2023. (REUTERS/Denis Balibouse)

Credit Suisse, the battered Swiss bank, has agreed to an emergency takeover by its rival UBS, Switzerland’s largest bank, a move engineered by the Swiss government to stave off immediate concerns of a global financial crisis.

The hasty deal, which was announced Sunday following a weekend of negotiations, offers a temporary reprieve after days of panic in global markets triggered by the collapse of Silicon Valley Bank. But it does little to ease longer-term worries of instability in the banking system.

A “swift and stabilizing solution was absolutely necessary,” Alain Berset, president of the Swiss Confederation, said during a Sunday afternoon news conference. The UBS deal, he added, was “the best solution for restoring the confidence that has been lacking in financial markets recently.”

Meanwhile, Treasury Secretary Janet L. Yellen and Federal Reserve Chair Jerome H. Powell said in a joint statement Sunday afternoon that they “welcome” the announcement.

“The capital and liquidity positions of the U.S. banking system are strong, and the U.S. financial system is resilient,” they wrote. “We have been in close contact with our international counterparts to support their implementation.”

But many banking experts remain doubtful that the banking turmoil is over.

"The forced merger of UBS and Credit Suisse ends one potentially systemic problem, but this is far from over,” said Joe Brusuelas, chief economist at the consulting firm RSM. “Now the question is: What other banks are at risk and what is the nature of that risk? This is the start of a multi-month adjustment.”

UBS is paying 3 billion Swiss francs, or $3.3 billion, for Credit Suisse in an all-stock deal, which is well under the bank’s market value of $8 billion as of Friday. The Swiss National Bank said it would lend up to 100 billion Swiss francs, or about $108 billion, to help facilitate the takeover.

In addition, Swiss authorities are planning to speed up the process by circumventing laws that would require a shareholder vote, UBS executives said Sunday.

The Credit Suisse announcement coincided with a coordinated move by central banks to ease strains in dollar funding markets and signal confidence in the global system. The Fed, Bank of Canada, Bank of England, Bank of Japan, European Central Bank and the Swiss National Bank said they would expand the frequency of dollar swap line operations, moving from weekly to daily, starting Monday.

The template has been used before in 2008 and 2020 to ease market uncertainty and stave off broader panic. The goal is to ensure that central banks can hold on to easy access to dollar funding, which can dry up when the market is under strain.

“The action today made sure that any dollar funding pressure [is] quashed to ensure payments clear,” Brusuelas said. “It’s preventive action to make sure the plumbing of the global financial architecture keeps flowing.”

The moves over the weekend are expected to tee up another bumpy week. The Fed is set to convene Tuesday and Wednesday for its March policy meeting, where policymakers will craft a fresh set of economic projections. They are expected to raise interest rates by a quarter of a percentage point at the conclusion of the two-day meeting. But they will eventually pause rate increases to limit any hazardous consequences of the Fed’s aggressive campaign to fight inflation.

Just two weeks ago, some Fed watchers speculated that the central bank might go with half a percentage point, fearing the economy was showing signs of heating back up. But that possibility vanished within days as concerns grew that the repercussions of the Fed’s inflation fight might disrupt the nation’s own financial stability.

How the Fed’s inflation fight fueled banking turmoil, in 7 charts

Credit Suisse woes

The takeover of Credit Suisse caps more than a week of speculation over the Swiss giant’s fate amid growing fears of a global financial crisis after two U.S. regional banks, Silicon Valley Bank and Signature Bank of New York, failed this month. Although U.S. regulators have taken sweeping steps, including backstopping deposits, those measures have not done enough to assuage fears of a cascading banking crisis.

Those concerns went global in recent days, after Credit Suisse warned of “material weaknesses” in its financial reporting. On Thursday, the bank received $53.7 billion in emergency funds from Switzerland’s central bank, but it wasn’t enough to restore confidence in the bank’s viability. Shares of Credit Suisse have tumbled more than 20 percent in the past week, and more than 75 percent from a year ago.

Credit Suisse’s downfall stemmed from years of poor decisions and scandals. A long stretch of mismanagement, compliance issues and a critical data breach contributed to the trouble, including roughly $8 billion in losses last year alone.

Then, the collapse of Silicon Valley Bank this month set off widespread alarm in the banking system, which helped sink Credit Suisse’s stock price by 14 percent in one day.

“Credit Suisse was already on shaky ground,” said John Sedunov, a finance professor at Villanova University. “There was a confluence of factors, a confluence of missteps along the way that got us here. But most recently, people started to panic. They looked for weak spots, and Credit Suisse happened to be a big one.”

The banking behemoth’s mounting problems, he said, were “a much bigger deal globally” than SVB’s collapse. Letting Credit Suisse fail would have been catastrophic to the European banking system and undermined Switzerland’s standing as a global financial center.

“The Swiss government had too much to lose to let this fail,” Sedunov said. “This deal was done in-house, with a white knight from within. It was very important for Switzerland that this stayed within borders for them.”

But the merger of two major financial institutions is likely to bring its own set of challenges. UBS plans to slash Credit Suisse’s investment banking arm in hopes of bringing it in line with a more “conservative risk culture,” UBS Chairman Colm Kelleher said during a news conference Sunday.

Analysts noted that the “shotgun wedding” between UBS and Credit Suisse provides immediate financial stability but raises worrisome questions about the next domino that could fall.

“The [Credit Suisse] drama now shifts from negotiation risk to execution risk, which the Swiss authorities are moving aggressively to manage down, but is not zero,” Evercore ISI’s Krishna Guha and Peter Williams wrote in an analyst note on Sunday. “Market focus will likely broaden out to other weaker European banks as well as U.S. regional banks.”

Eyes on the Fed

The past week has also raised new questions on what it will take to avert another international crisis, and who is to blame for the damage already done. The Wall Street Journal and New York Times reported over the weekend that the Fed’s warnings about Silicon Valley Bank stretched back more than a year, but those ultimately fell short.

The Fed is investigating the glaring gap in oversight, with the probe headed by Michael S. Barr, the Fed’s chief banking cop. Those results are expected to be made public by May 1.

Lawmakers are also increasing their scrutiny. On Sunday, Sen. Elizabeth Warren (D-Mass.) called on Congress to lift the federal insurance cap for bank deposits above $250,000, one week after the Biden administration announced it would protect all depositors at Silicon Valley Bank, regardless of how much money they had in the failing institution. Warren, who sits on the Senate Banking Committee and is a commercial and bankruptcy law expert, suggested raising that figure to anywhere from $2 million to $10 million during an interview on CBS’s “Face the Nation.”

She also urged lawmakers to repeal a provision of the 2018 law that had loosened restrictions on banks with $50 billion or more in assets, saying the latest tumult in the financial system underscored her belief that the Fed has fallen short in its core duties. Calling for an end to rate increases, she said higher borrowing costs don’t do anything to solve the economy’s root problems and risk putting people out of work in the meantime.

Amy B Wang contributed to this report.


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