22 November 2023
With fears of a global banking crisis after the Silicon Valley Bank and Signature Bank collapses, UBS has come to the rescue of Credit Suisse, acquiring the troubled bank for 3 billion Swiss francs ( AUD $4.5 million).
With fears of a global banking crisis after the Silicon Valley Bank and Signature Bank collapses, UBS has come to the rescue of Credit Suisse, acquiring the troubled bank for 3 billion Swiss francs (AUD $4.5 million).
In the process, UBS Group AG (UBSG.S) will assume up to $5.4 billion in losses for the famous, 167-year-old Swiss bank.
It is a package that was engineered by Swiss regulators on Sunday, along with emergency liquidity provided by five major central banks to help bolster the embattled global banking system and avoid a collapse not seen since the fall of Lehman Brothers in 2008.
The U.S. Federal Reserve joined central banks in England, the EU, Japan, Canada and Switzerland in a coordinated attempt to enhance market liquidity, a global response comparable to when the pandemic was at its peak. In addition, the European Central Bank vowed to support other euro zone banks with loans if needed, in an attempt to restore calm in the financial sector.
Local markets fell off the back of the takeover news, with the ASX 200 (XJO) closing 1.4% lower on Monday, hitting a new 50-day low in the process.
However, global markets rebounded overnight on Monday, with the S&P 500 rising 0.9% and the Nasdaq Composite finishing 0.4% higher. In Europe, the major indices also finished strongly, with the FTSE 100 adding 0.9%, the Stoxx 600 index gaining 0.8% and the CAC 40 rising 1.3% by the end of trade.
Banks led US stocks higher, JPMorgan Chase and Morgan Stanley leading the charge with 1.1% and 1.8% gains respectively, amid bailout optimism, while Australian shares recovered most of Monday’s fall on yesterday’s early morning trade.
However, there is still some uncertainty in the banking sector after U.S. medium-lender, First Republic’s shares plummeted 47.1% on Monday. This is despite recent efforts to shore up the regional bank, with 11 major U.S. banks injecting $30 billion worth of deposits into First Republic on Friday.
Meanwhile, there may also be repercussions in the $275 bn bond market, as the Credit Suisse deal wiped out bondholders who owned about US $17bn of risky Credit Suisse debt.
This bank debt is known as Additional-Tier 1 (AT1) bonds, which are securities that were created after the 2008 global financial crisis to prevent future bail-outs. The purpose of AT1 bonds was to act like high-yield bonds in good times and conversely convert to equity to absorb losses when trigger points were reached (I.E. a bank’s capital falling below certain levels relative to assets).
The Credit Suisse bond write-down could potentially have a ripple effect on AT1 investor holdings at other banks, a trade-off caused by UBS’ Credit Suisse takeover and central bank liquidity action.
While the banking sector is still unstable with the effects of Credit Suisse’s acquisition not fully felt yet, global markets are still jittery amid this uncertainty.
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