What does the Credit Suisse purchase mean for the global economy?
Swiss investment bank Credit Suisse has been purchased by its longtime rival UBS. What does the acquisition mean for the global economy, and what are financial insiders saying about it? Here's everything you need to know:
What are the details of the purchase?
Credit Suisse announced it had been acquired by UBS for $3.2 billion, saying that the two banks "concluded that it would be in the best interest of their shareholders and their stakeholders to enter into the merger" amidst ongoing concerns over the global economy. Credit Suisse notes that the deal was completed after the Swiss government "asked both companies to conclude the transaction to restore necessary confidence in the stability of the Swiss economy and banking system."
The deal is "perhaps the most sweeping shake-up of the global banking sector since the 2008 financial crisis, when one-time financial giants were acquired by rivals to avoid catastrophic meltdowns," The New York Times says. The 166-year-old bank, once a staple Swiss institution, has been beset by recent scandals and lawsuits that have drastically hurt its reputation. The recent fall of American bank SVB and the potential for similar bank implosions were the final straw, and exposed Credit Suisse's "longstanding vulnerabilities into sharp relief and hastened its demise — highlighting just how panicked investors are," the Times adds.
What effect will Credit Suisse's acquisition have on the world economy?
Switzerland is a pillar of the global banking system, and the government's push for the acquisition "[suggests] they're deeply concerned about the ongoing banking crisis," Insider reports, and the efforts of the U.S. Federal Reserve and other central banks to assist foreign markets reflect this global concern.
The merger "also has clear parallels with the banking deals sealed during and after the 2008 financial crisis," Insider adds. During this period of conglomerate mergers, J.P. Morgan acquired Bear Stearns and Washington Mutual, Bank of America bought Merrill Lynch, and Well Fargo snagged Wachovia.
Despite the insistence of Swiss officials, "the deal does not appear to have laid to rest concerns about systemic risks to global markets," CNBC says, noting that shares of both UBS and Credit Suisse plunged following the purchase. Despite this, government officials in numerous countries applauded the move as one that would support financial stability, with the Bank of England saying it had "been engaging closely with international counterparts throughout the preparations for today's announcements and will continue to support their implementation."
There are still larger questions about the long-term effects the merger could have on the economy. "This solves what I think is probably an idiosyncratic problem at Credit Suisse, but I'm not sure it's a firebreak big enough to stop the rot for the market," James Sym, head of equities at London-based investment manager River and Mercantile, tells CNBC.
What are financial experts and Wall Street insiders saying?
The true impact of Credit Suisse's faults may not yet be fully understood, especially given that the bank's most risk-laden bonds, known as AT1s, were wiped completely out following the merger, leaving many investors with nothing. "With the restructuring of Credit Suisse, no one had really thought about how it would affect the AT1 and that was a fat tail risk," Sean Darby, global equities strategist at Jefferies in Hong Kong, tells Reuters.
Many people on Wall Street voiced similar concerns about what the merger says for the overall world economy. "There are many uncertainties and significant risks," Andreas Venditti, an analyst with another Swiss bank, Vontobel, tells Yahoo! Finance. Venditti adds that "the issues currently impacting the global banking sector are not over" even though the merger helped avoid "massive consequences for the Swiss economy."
This positive sentiment was echoed by Lotfi Karoui from Goldman Sachs, who told the outlet that "in both the USD and EUR markets, the excess premium that investors had been demanding to hold European bank credit risk now has room to compress." Karoui adds, "The liquidity and loss guarantees provided by ... the Swiss government are likely to act as dampeners for tail risk and help close the recent valuation gap between European banks and non-financials."
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