Sources have reported that UBS AG (UBSG.S) is considering the acquisition of Credit Suisse (CSGN.S), its struggling Swiss counterpart, in an effort to prevent the ongoing crisis at the bank from potentially destabilizing the worldwide financial system.
With the collapse of U.S. lenders Silicon Valley Bank and Signature Bank in recent weeks, Credit Suisse, which has been in operation for 167 years, is the most prominent institution to be caught up in the resulting market turbulence, leading to a general loss of investor trust on a global scale.
Banking executives and regulators in the United States and Europe have taken significant steps to reinforce the industry and rebuild confidence. The Biden Administration has taken action to safeguard consumer deposits, while the Swiss central bank has loaned billions of dollars to Credit Suisse to stabilize its unstable financial position.
According to two sources familiar with the matter, UBS is facing pressure from Swiss authorities to acquire its domestic rival in an attempt to mitigate the ongoing crisis. Under the proposal, the Swiss government may provide a guarantee against the associated risks, and Credit Suisse’s Swiss business could potentially be divested.
UBS, Credit Suisse, and Switzerland’s financial regulator FINMA have declined to provide a comment.
According to sources familiar with the matter cited by the Financial Times, UBS, Credit Suisse, and regulators are working quickly to finalize a merger deal as early as Saturday evening.
In the past week, Credit Suisse’s shares have fallen by 25%, and the bank has been compelled to seek $54 billion in central bank financing as it strives to rebound from a series of scandals that have eroded the trust of investors and clients. This has made it the first major global bank to rely on emergency assistance since the 2008 financial crisis.
As one of the 30 global systemically important banks, Credit Suisse is among the world’s largest wealth managers, and its failure could have a ripple effect throughout the entire financial system.
In a note to clients late on Friday, Goldman analyst Lotfi Karoui stated that the banking sector’s fundamentals are stronger, and global systemic interconnections are weaker than they were during the 2008 global financial crisis. This, according to Karoui, reduces the risk of a “potential vicious circle of counterparty credit losses.”
“Karoui suggested that a more assertive policy response might be necessary to stabilize the situation. Additionally, the bank warned that the uncertainty surrounding Credit Suisse’s future could place strain on the wider European banking industry.
Over the weekend, a high-ranking official at China’s central bank expressed concerns about the potential repercussions of elevated interest rates in major developed economies on the financial system.
Reports have emerged indicating that multiple competitors have expressed interest in acquiring Credit Suisse. While Bloomberg claimed that Deutsche Bank is exploring the option of purchasing some of its assets, U.S. financial giant BlackRock (BLK.N) has denied allegations that it is involved in a competing bid for the bank.”
The collapse of Silicon Valley Bank, based in California, has highlighted the mounting pressure on the banking sector due to continued interest rate hikes by the U.S. Federal Reserve and other central banks, such as the European Central Bank. This collapse, along with Signature’s, marks the second and third-largest bank failures in U.S. history, behind Washington Mutual during the 2008 global financial crisis.
Since Silicon Valley Bank’s collapse, banking stocks globally have been hit hard, with the S&P Banks index falling 22%, marking its largest two weeks of losses since the pandemic disrupted markets in March 2020. In response, big U.S. banks have provided a $30 billion lifeline to smaller lender First Republic, while U.S. banks have requested a record $153 billion in emergency liquidity from the Federal Reserve in recent days.
Moody’s, a rating agency, has attributed this trend to “funding and liquidity strains on banks, driven by weakening depositor confidence.” This week, Moody’s downgraded its outlook on the U.S. banking system to negative.
Although some of the largest U.S. banks have saved the First Republic from collapsing, investors were taken aback by the bank’s cash position and the extent of emergency liquidity it required. This has brought attention to the need for greater oversight to hold banks and their executives accountable.
U.S. President Joe Biden has urged Congress to grant regulators more authority over the banking sector, such as the ability to impose higher fines, recover funds, and bar officials from failed banks.
