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Written by: Susannah Streeter | Hargreaves Lansdown:
- UBS will acquire Credit Suisse for $3.23 billion in state-backed rescue.
- Only a full transplant of its operations was deemed sufficient to stop the collapse of Credit Suisse.
- Central banks try to inject more calm by co-ordinating flow of dollars around the world.
- Initial welcome from markets in Asia evaporated as worries rose about risks of banking debt.
- The structure of the deal forced bond holders to accept losses while protecting some shareholders to a greater extent.
- Brent Crude falls more than 2% to $71 a barrel, its weakest level since December 2021 as worries rise about global economy.
Credit Suisse was on life support and Swiss authorities believed only a full transplant of the banks divisions into UBS would restore stability to the banking system. But an operation of this magnitude is a big risk for UBS – that’s why it was only willing to pay $3.23 billion, less than half the price its shares valued the bank at on Friday. It will not only have to accept the healthier parts of the business but its failing ones as well – particularly its investment division, which has been mired in crisis after crisis. UBS will now be looking to chop up and sell off big chunks of operations, to slim down in size, given that the combined balance sheet is twice the size of Switzerland’s economy.
The speed at which the 167-year-old institution deteriorated, when it was previously deemed too big to fail, has rocked the banking sector. As the shockwaves continue to ripple central banks have taken rear guard action to reduce the risks of contagion. They’ve co-ordinated currency swaps to enable the smooth flow of money around the world, to ensure financial institutions can easily tap into the dollars they need to operate.
Investors in Asia initially welcomed the action, but fresh worries are now coming to the surface about what could happen next. Focus is shifting to the implications of high-risk bond holders in banks, after holders of more risky Credit Suisse debt saw their investment wiped out, as under the deal those additional tier 1 bonds were valued at zero. In bankruptcy proceedings, bond holders are higher up the queue than shareholders, but under the contracts signed the same rules don’t have to apply given Credit Suisse was facing a clear viability issue and had already been given support from the central bank.
It is not yet known exactly where more pain will emerge in the banking sector, but investors fear the problems are not yet over. Shares in Standard Chartered and HSBC listed in Hong Kong fell by 7% after immediate relief at the Credit Suisse deal evaporated. Smaller lenders will be in focus again, particularly in the US, after First Republic Bank shares tanked by more than 30% despite the $30 billion lifeline given to it by large US banks.
Bigger lenders are still considered to be much better insulated from the chill winds still blowing through the banking sector. They have built up much bigger capital cushions since the financial crisis, have more stable deposits, and some are seeing greater inflows of cash as companies and individuals seek out safer havens to put their money. They are also much less likely to have to sell off bonds, they may have a paper loss on right now, but instead will be able to hang onto them until they mature.
But as risk aversion grips the sector, the worry is that overall banks will become more cautious in their lending, which could be another blow for already fragile housing markets in particular. Worries are rattling investors about what repercussions a potential lending squeeze will have on the global economy. The weaker oil price reflects this, with Brent Crude dropping more than 2% to $71 a barrel, its weakest level since December 2021.
Related: Stocks Continue to Slide as Banking Rout Reverberates Around the World