Even though UBS rescued Credit Suisse bank from the brink of collapse, the move was only a brief respite for investors and bankers as turmoil continued to brew for the industry.
On Sunday (Mar. 19), UBS agreed to buy Credit Suisse for 3 billion Swiss francs (S$4.33 billion) while assuming up to US$5.4 billion (S$7.24 billion) in losses.
It's a mere fraction of the 7.4 billion francs (S$10.66 billion) market value that Switzerland's second-largest bank had left when trading closed on Friday (Mar. 17).
The deal also came with other costs, as UBS announced a wipeout of Credit Suisse's additional tier 1 (AT1) bonds — meaning investors are set to lose 16 billion Swiss francs (S$23.04 billion).
Switzerland's fiance minister, Karin Keller-Sutte, emphasised that the deal is not a "bailout" but a "commercial rescue."
Issues have plagued the 167-year-old Credit Suisse for several years, but its near-collapse came only after the recent disintegration of two U.S. banks — Silicon Valley Bank and Signature Bank.
Series of scandals & leadership changes
In 2014, Credit Suisse pleaded guilty to criminal charges after it had allowed Americans to evade taxes illegally.
In 2020, it was also embroiled in an accounting scandal involving China’s Luckin Coffee, and its CEO, Tidjane Thiam, who resigned the same year due to a spying scandal.
The sell-off in the bank’s shares started in 2021, and over the past 12 months, its shares’ values have dropped by 75 per cent.
This was sparked by losses related to the collapse of financial services company Greensill and hedge fund Achergos.
Credit Suisse's chairman Antonio Horta-Osorio resigned eight months into the job in January 2022 after an internal investigation found that he had violated Covid-19 rules.
In October 2022, Credit Suisse was hit by rumours on social media of their impending collapse, leading to massive outflows.
The "last straw"
On Mar. 15, the chairman of Credit Suisse's largest shareholder, Saudi National Bank, told Bloomberg that it will not increase its stake.
"Absolutely not, for many reasons outside the simplest reason, which is regulatory and statutory," he said.
The comment triggered investor panic even though the statement wasn't new; the Saudi bank said in October 2022 that it wasn't planning to expand its holding beyond its 9.88 per cent stake.
The chairman's announcement led to a record plummet of 31 per cent in the value of the Swiss bank's shares, and the bank subsequently had to be saved by UBS.
Why does it matter?
Credit Suisse is a “global systemically important bank”, a categorisation that it shares with other major banks such as JP Morgan, HSBC, and the Bank of China.
It is the first big global bank to receive an emergency lifeline since the 2008 Global Financial Crisis, according to Nikkei Asia.
According to Andrew Kenningham, an economist at Capital Economics, the Swiss bank is a “much bigger concern for the global economy” than the two U.S. banks that had collapsed the previous week.
“Credit Suisse is much more globally interconnected… not just a Swiss problem but a global one,” he wrote.
Is Credit Suisse the latest victim of the "contagion effect"?
Credit Suisse's ordeal also sparked concerns that its fall was part of the contagion effect from the aftermath of Silicon Valley Bank and Signature Bank's collapse — and that there will be more to follow.
However, some analysts have pointed out that the nature of Credit Suisse's woes was different from those of the American banks.
For example, Credit Suisse's problems have been longstanding.
Even though the two banks had little connection with Credit Suisse, their collapse resulted in greater scrutiny of banks generally.
"There's sort of contagion — not because they [SVB] had any connection with Credit Suisse, but because investor sentiment changed and people were scrutinising other banks more carefully, and Credit Suisse is seen as the weakest link," Kenningham said.
Will this impact Singapore?
After the announcement of the takeover, Singapore's Straits Times Index (STI) fell 43.52 points (1.4 per cent) to 3,139.76 by the end of Monday (Mar. 20).
As dull sentiments over the banking sector lingered, DBS, UOB, and OCBC saw their stock prices closing lower.
However, as U.S. investors were more optimistic about the UBS takeover, the three major stock indexes, S&P 500, Dow Jones Industrial Average, and Nasdaq Composite, all closed higher with gains between 0.39 per cent and 1.20 per cent.
This spurred a rally in Singapore's stock market after opening today (Mar. 21), and STI crossed the 3,180 mark at 10am.
DBS, UOB, and OCBC stocks similarly rallied.
Local banks have "insignificant exposure"
DBS, OCBC, and UOB have clarified that their exposure to the Credit Suisse crisis was “insignificant”.
Despite the successful brokering of a rescue deal, Credit Suisse's employees were said to be facing an uncertain future, Reuters reported.
An unnamed senior employee from Singapore was quoted saying that it was "an extremely sad day" for the Swiss bank, and future operational plans remain unclear.
MAS will continue to monitor the situation
In its statement issued on Monday (Mar. 20), the Monetary Authority of Singapore (MAS) said that Credit Suisse will continue operating in Singapore with no interruptions or restrictions, following the announced acquisition by UBS.
“Customers of [Credit Suisse] will continue to have full access to their accounts and [Credit Suisse’s] contracts with counterparties remain in force. The takeover is not expected to have an impact on the stability of Singapore’s banking system.”
According to MAS, UBS, and Credit Suisse do not serve retail customers in Singapore as their primary activities are in private and investment banking.
MAS also added that they were in close contact with the Swiss Financial Market Supervisory and that it will continue to closely monitor the domestic financial system and international developments.
Top image via Unsplash/Claudio Scharwz