On Sunday, the Swiss banking giant Credit Suisse was acquired by its rival UBS in a government-backed deal aimed at preventing fears over banks from spreading. The move was made urgently to restore confidence in the financial markets before they opened on Monday, amid concerns over the global financial system following the failure of two smaller US banks in recent weeks. Despite regulators’ reassurances that the country’s banking system is safe, the markets have responded with mixed reactions.
Market Reaction
While regulators are reassuring the public of the safety of banks, the UK and Asia stock markets fell. London’s FTSE 100 index was down 1.6% in early trading, Japan’s Nikkei 225 lost 1.4%, and Hong Kong’s Hang Seng Index fell 2.6%. Shares in British banks were also affected, extending losses from last week, which was their worst weekly performance in over a year. Shares in UBS were down 12% following its acquisition of Credit Suisse.
Experts Reassure Against a Repeat of the 2008 Financial Crisis
Despite the concerns, experts are not predicting a repeat of the 2008 financial crisis, which sparked a global recession. The Swiss National Bank said that the rescue deal for Credit Suisse was the best way to restore the confidence of financial markets and to manage risks to the economy. However, the last-minute deal valued Credit Suisse at just over $3.15bn, a fraction of its $8bn price tag on Friday.
Backstop to Ease Strains in Global Funding Markets
In a bid to keep cash available throughout the global financial system, six central banks, including the Bank of England, announced that they would increase the flow of US dollars through the global financial system. The statement following UBS’s takeover of Credit Suisse said that the deal protected the Swiss economy “in this exceptional situation.”
UBS’s Plan for Credit Suisse
UBS chairman, Colm Kelleher, said that UBS would be winding down the investment banking part of Credit Suisse. It is too early to say what will happen to jobs, but UBS has around 74,000 staff, with approximately 5,000 of them in the UK.
Causes of the Crisis of Confidence
Credit Suisse is the latest and most important casualty of a crisis of confidence that has already seen the failure of two mid-sized US banks and an emergency industry whip-round for another. The reasons for each failure differ slightly, but the main factor has been a sharp rise in global interest rates, which has hit the value of even safe investments that banks keep some of their money in. That has spooked investors and seen the share prices of all banks fall, with those considered weakest hit hardest.
UBS’s Acquisition Praised by Financial Institutions
The Bank of England welcomed the “comprehensive set of actions” set out by the Swiss authorities. Christine Lagarde, president of the European Central Bank, said she welcomed the “swift action” of the Swiss authorities. US Treasury Secretary Janet Yellen and Federal Reserve chairman Jerome Powell both said the US banking system remained “resilient.”
Conclusion
Despite the uncertainty and concern surrounding the situation, the banking industry and regulators have taken prompt and decisive action to prevent a more significant financial crisis. The financial authorities in the EU, US, and UK support this deal and are reassuring the public that banks are strong and people’s savings and deposits are safe. The success of this Swiss rescue in calming nerves in the financial world will only be determined when financial markets open on Monday. The urgency to finalize the deal on Sunday night demonstrates the significance of this rescue, as Credit Suisse was considered one of the top 30 most important banks globally. The acquisition of Credit Suisse by UBS is a significant move that will reshape the banking industry. The impact of the acquisition on the global financial system will become clearer in the coming weeks and months. The situation highlights the need for financial institutions and regulators to remain vigilant and proactive in managing risks to the economy. The future of the banking industry will depend on its ability to adapt to a rapidly changing financial landscape.
