With concerted actions to save banks, it is a double-edged sword on the financial markets. On the one hand, solutions provide security and peace of mind – at least that’s what they should do. On the other hand, they also signal that there is a fire, and that it is ablaze. In order to extinguish a smoldering fire around the traditional Swiss bank Credit Suisse, one crisis meeting followed the next at the weekend: Finally, an agreement was reached on a takeover of the ailing bank by its larger rival UBS. Purchase price: Around three billion Swiss francs. This puts an end to the tremors about the future of Credit Suisse. But the smoke hasn’t cleared yet.
At the Frankfurt Stock Exchange it went steeply downhill at the start of the new trading week. As in the past week, the shares of Commerzbank and Deutsche Bank were under strong pressure, the latter temporarily lost almost ten percent in value in the morning. The Japanese Nikkei index in Tokyo and other indices in Asia had previously fallen. Last week, the German stock index DAX fell by more than four percent – it was the blackest week on the stock market since June last year. In the course of the day, the DAX turned positive again, and the bank stocks were at least able to limit their losses. The nervousness is palpable.
200 billion guarantee
The aim was to prevent further uncertainties on the financial markets through the merger. In addition, the Swiss central bank, the government and the banks agreed on the emergency purchase by UBS in marathon meetings over the weekend. The deal is secured by numerous support measures: UBS is responsible for possible losses of up to five billion francs; the state has given a loss guarantee of nine billion Swiss francs. The Swiss central bank gives liquidity guarantees in the amount of up to 200 billion Swiss francs.
Other central banks welcomed the measures. ECB President Christine Lagarde and Fed Chair Jerome Powell praised the Bernese government and the other parties involved for their decisive action. Both the head of the ECB and her US colleague see the banking landscape in their regions as resilient, and the banks on both sides of the Atlantic have sufficient capital and liquidity.
With a view to Europe, Hans-Peter Burghof agrees. “In my opinion, Credit Suisse is actually the weakest of the large institutions in Europe,” said the professor of banking and financial services at the University of Hohenheim. “Other than that, I hear rather positive news from the banking sector. We see that the big German banks in particular are achieving decent results – they are benefiting from the higher interest rates. I have no information that these banks are now having any major problems.”
consequential damage of the interest rate hike
Nevertheless, the telephone lines in central banks around the world were glowing over the weekend. For example, the ECB, Fed and other central banks announced a coordinated move to ease dollar banking in a bid to calm financial markets.
The fact that the central banks are once again at the center of this emergency rescue is pretty much self-explanatory. The sharp rise in interest rates in recent months – brought about by the central banks to combat inflation – has pushed down the prices of current government bonds. However, the Silicon Valley Bank had to sell parts of its holdings at the fallen prices because investors wanted to withdraw their funds from the bank. The losses led to the collapse of the US bank – and fueled the Credit Suisse crisis, which has been shaky for months. The US Federal Reserve, together with the US government, reacted promptly to calm the situation. The massive liquidity guarantees of over 200 billion Swiss francs by the Swiss central bank have a similar function.
The course of the crisis at Credit Suisse explains why this might be necessary. First of all, the bank had attracted attention in recent years mainly due to mismanagement and numerous scandals. As a result, the share price has plummeted. Even more serious: customers withdrew massive amounts of capital from the bank. Capital outflows totaled 123 billion Swiss francs last year. After the bankruptcy of the Silicon Valley Bank in the USA a week and a half ago, the decline accelerated, recently around eleven billion francs flowed out every day and caused the imbalance.
Financial markets “are unstable”
It was therefore the goal of everyone involved at the weekend to find a solution before the opening of stock exchange trading in Asia in order to prevent an uncontrolled collapse of the major Swiss bank. Because Credit Suisse belongs to the illustrious group of 30 institutions worldwide that have the attribute “systemically important”. In short, she is Too big to failor, in other words: Because of their international interconnectedness, a bankruptcy would very likely have plunged the global banking and financial sector into a new crisis.
The emergency takeover is also the largest bank merger since the great banking and financial crisis in the years after 2007/2008. At that time, the managers of Lehman Brothers gambled on the US real estate market. As a result, the entire global economy fell into one of the worst crises ever.
“The weekend emergency merger shows how unstable the financial markets are,” says Gerhard Schick of the Finanzwende citizens’ movement. “The pressure from the markets was so great that we felt compelled to take this step.” However, this naturally poses the problem on a larger scale: UBS, with total assets of a good CHF 1 trillion, is taking over Credit Suisse’s total assets of over CHF 500 billion.
This creates a colossus with a monopoly position in many market areas in Switzerland. “2008 actually taught us that we shouldn’t have banks that are too big. With this merger of two banks that were already systemically important before, we get an even bigger player that must certainly not go bankrupt. This solution is not sustainable and exacerbates it Just a too-big-to-fail problem,” says Gerhard Schick.