The fallout from recent bank closures in the U.S. continues to be felt. But the shockwaves extend well beyond the nation’s borders and are even affecting longstanding banking icons. Over the weekend, after progressive fears of the collapse of Swiss bank Credit Suisse, a deal was struck. Rival Swiss bank UBS will purchase Credit Suisse through an agreement brokered by the Swiss government. For many, the UBS-Credit Suisse deal offers a sigh of relief. For others, the Credit Suisse bank failure fuels existing concerns about the health of banking institutions worldwide. Some expect more banking failures will soon follow as a result.
(What happened to Silicon Valley Bank? Bold has a basic explainer for you here, but stay tuned for a more in-depth analysis!)
The failure of tech-heavy investment banks like Silicon Valley Bank and Signature Bank seemed to trigger fear and panic. Though neither were top-tier banking institutions, they possessed enough assets and deposits to cause widespread alarm. These fears prompted U.S. regulators and the FDIC to step into avert further panic. But few imagined similar sentiments abroad would trigger other events like the Credit Suisse bank failure. Though the UBS-Credit Suisse deal wasn’t necessarily a bailout, it has many similar features. And this is where the real problems lie when it comes to financing these institutional collapses.
“This is a historic day in Switzerland, but frankly, a day we hoped would not come.” – Colm Kelleher, UBS’s chairman
A Look Back at Credit Suisse
The Credit Suisse bank failure is indeed a historic event based on the institution’s longevity alone. The bank was originally founded some 166 years prior when it formed to finance the Swiss rail network. Since then, the Zurich-based bank became the premier bank in the nation up until the last few decades. It was then that several missteps and scandals undermined Credit Suisse’s reputation, allowing UBS to gain ground. Unlike Credit Suisse, UBS rose in prominence through small bank mergers and acquisitions over time. Thus, there is a bit of irony in the UBS-Credit Suisse deal that allows UBS to finally enjoy national dominance.
The issues that helped lead to the Credit Suisse bank failure were multiple. Since the 2008 financial crisis, the bank has struggled to recover. But unlike UBS, many of its troubles were self-inflicted. Several scandals affected the bank including traders who were found guilty of manipulating foreign exchange markets. Foreign bribes as well as drug laundering schemes were also identified, resulting in billions of dollars in fines. In addition, Credit Suisse lost over $147 billion recently in deposits and announced reporting variances. Thus, things had been well primed for the Credit Suisse bank failure long before the collapse of other institutions.
“We welcome the announcements by the Swiss authorities today to support financial stability.” – Statement by Janet L. Yellen, U.S. Treasury Secretary
The Making of the UBS-Credit Suisse Deal
As noted, the triggering event to the Credit Suisse bank failure began with Silicon Valley Bank’s demise. The preexisting issues with Credit Suisse made it vulnerable to investor panic. As a result, Credit Suisse saw its shares take a dive last week, causing worries of an impending financial crisis. The Swiss government and regulators stepped in to assure investors of the bank’s stability. However, confidence was not restored, and by week’s end, billions of dollars had been withdrawn. The Swiss Central Bank initially proposed offering the bank a $54 billion lifeline. But ultimately, they brokered the UBS-Credit Suisse deal over the weekend before markets opened Monday.
Prior to the final UBS-Credit Suisse deal, UBS had offered a $1 billion buyout of the bank. Credit Suisse quickly refused, however, stating its real estate holdings alone were worth more. Subsequently, Swiss regulators paved the wave for a separate agreement where UBS will pay $3.2 billion to takeover Credit Suisse. UBS will pay 0.76 of its own share price for each share of Credit Suisse. In addition, regulators erased $17 billion in Credit Suisse bonds so that shareholders would not have to vote on the deal. These measures along with a $100 billion credit line for UBS is what ultimately finalized the buyout. It would seem that the Credit Suisse bank failure was quite beneficial for UBS.
“The sum of Credit Suisse’s parts is much greater than what UBS is paying.” – Johann Scholtz, Analyst at Morningstar
Is the UBS-Credit Suisse Deal a Bailout or Not?
Those affiliated with both banks and especially Swiss regulators are quick to claim the UBS-Credit Suisse deal is not a bailout. To exome extent, they are right. The actual agreement reflects a buyout of Credit Suisse by UBS that is based on discounted share prices. But it’s the allowances and debt of these discounts that suggest otherwise. The $3.2 billion purchase price is a fraction of what Credit Suisse is reported to be worth. And the extension of Swiss Central Bank loans to support the buyout is quite nice as well. Given the fact that the Credit Suisse bank failure will occur makes it hard to say the arrangement is a true bailout. But given the financial supports present, perhaps the term “partial bailout” is more appropriate.
From the perspective of financial regulators, the UBS-Credit Suisse deal was essential in averting a financial crisis. Likewise, given that they insisted on another Swiss bank being involved, UBS was really the only option for the buyout. But the losses related to the Credit Suisse bank failure will be felt broadly with the Swiss government picking up the tab. This means that once again Swiss citizens will be footing the bill for this government-supported buyout deal. Even with a history of scandals and missteps, Credit Suisse will not be held truly accountable. Because their demise poses much larger threats to a financial system, government invention occurs. Indeed, this is unjust in many ways. But until greater oversight or broader system reforms demanding accountability occur, such bailouts will continue to occur.