Lehman moment in sight: Credit Suisse’s fate rests on UBS deal!

Fragile reality of the global banking system is coming to the surface as cracks are appearing everywhere in the highly connected financial markets with every day passing by as the Fed continues its rate hike policy to curb the highest developed market inflation in 4 decades. 167 years old legacy of Swiss investment bank and financial services firm is hanging in uncertainty, sparked by the comments of its largest individual shareholder Saudi National Bank which declined to inject further capital, citing regulatory and statutory reasons. Saudi National Bank already sits on around 9.9% and any further buying would throw it into totally different regulatory regime, which it intends not to be a part of.

Credit Suisse has been allowed to borrow up to 50 billion Swiss francs ($53.68 billion) from the Swiss National Bank, considering the fact that it is amongst the top 30 systematically important global banking firms, failure of which could trigger the Lehman moment and the repercussions have the potential to scale up to the world wide banking industry with same/more intensity (but not less) as it did in 2008 during GFC.

UBS Group has offered 1 billion USD all stocks takover to embattled Credit Suisse at 0.25 Swiss Franc which is to be paid in UBS stock. As per bloomberg, Credit Suisse has opposed the offer citing it to be “too low”, which already stands to be void in case the credit default spreads jump by 100 basis points or more. The severity and urgency of the matter can be understood from the fact that Swiss government is considering modifying existing country rules to skip shareholder approval and also mulling about allowing bondholders to take the hit! Under existing rules, UBS has to give its shareholders 6 weeks to decide on whether to go forward with the all stocks deal.

Further, around 500 billion USD has already been evaporated from MSCI World Financials Index and MSCI EM Financials Index combined in a matter of days since the collapse of Silicon Valley, Signature and Silvergate Banks in the US. Meanwhile JPMorgan Chase, Citigroup, Bank of America, Wells Fargo, Goldman Sachs and Morgan Stanley (total 11 major US banks) have injected $30 billion in deposits into First Republic Bank (FRC). Unable to calm the investors, FRC closed 30% down as Moody’s downgraded the credit rating to junk (B2 from Baa1). Despite the financial markets turmoil, the European Central Bank moved forward with a 50-basis-point rate hike, raising interest rates to 3.5%. Opposite to Goldman Sachs’ view, we believe the Fed will move forward with atleast 25 basis point hike on 22nd March, 2023.

Last updated on March 22nd, 2023 at 02:36 am