Banking giant UBS is buying smaller rival Credit Suisse in an effort to avoid further market-shattering turmoil in global banking, Swiss President Alain Berset announced late Sunday.
Berset, who did not specify the value of the agreement, described the announcement as “of great scope for the stability of international finances. An uncontrolled collapse of Credit Suisse would have incalculable consequences for the country and the international financial system.
Credit Suisse has been designated by the Financial Stability Board, an international body that oversees the global financial system, as one of the world’s systemically important banks. This means that regulators believe its runaway failure would send ripples through the entire financial system, not unlike the collapse of Lehman Brothers 15 years ago.
Sunday’s news conference follows the collapse of two major US banks last week that prompted a frenzied and sweeping response from the US government to prevent further bank runs. Still, global financial markets have been on edge since Credit Suisse’s share price began to slide this week.
Credit Suisse, 167, has already received a loan of $50 billion or 54 million Swiss francs from the Swiss National Bank, briefly causing a spike in the bank’s share price. However, the measure did not appear to be enough to stop an outflow of deposits, according to press reports.
Still, many of Credit Suisse’s problems are unique and do not overlap with the weaknesses that brought down Silicon Valley Bank and Signature Bank, whose failures led to a major bailout effort by the Federal Deposit Insurance Corporation. and the Federal Reserve. As a result, its fall does not necessarily signal the start of a financial crisis similar to the one that occurred in 2008.
The deal caps a highly volatile week for Credit Suisse, particularly on Wednesday, when its shares fell to a record low after its biggest investor, the Saudi National Bank, said it would not invest any more money in the bank to avoid a stumble. with the regulations that it would kick in if its stake increased to around 10%.
On Friday, shares fell 8% to close at 1.86 francs, or $2, on the Swiss stock exchange. The share has experienced a long fall: it was trading at more than 80 francs in 2007.
Its current problems began after Credit Suisse reported Tuesday that managers had identified “material weaknesses” in the bank’s internal controls over financial reporting late last year. That stoked fears that Credit Suisse would be the next domino to fall.
Although smaller than its Swiss rival UBS, Credit Suisse still wields considerable influence, with assets under management of $1.4 trillion. The firm has major trading desks around the world, caters to the rich and well-to-do through its wealth management business, and is a leading adviser to global companies on mergers and acquisitions. Notably, Credit Suisse did not need government assistance in 2008 during the financial crisis, while UBS did.
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Despite the banking turmoil, the European Central Bank on Thursday approved a large half-percentage point hike in interest rates to try to curb stubbornly high inflation, saying Europe’s banking sector is “resilient” with strong finances.
ECB President Christine Lagarde said banks “are in a completely different position than they were in 2008” during the financial crisis, partly because of tighter government regulation.
The Swiss bank has been pushing to raise money from investors and launch a new strategy to overcome a series of problems, including bad bets at hedge funds, repeated shakeups of its top management and a spying scandal involving UBS.