UBS buys beleaguered CSFB - “this is a commercial solution, not a bailout.”

The banking sector last week

Last week ended as it started, with the US and European equity markets under pressure on concerns over the health of the banking sector.

Although regulators acted swiftly and forcefully to restore liquidity and confidence, cracks remained, and markets have a knack for finding cracks and testing confidence.

While concerns in the US have been mainly restricted to the smaller regional banks (after the Fed moved to guarantee the deposits at the larger too big to fail banks), the backdrop in Europe was made more complicated by the woes of Swiss Bank Credit Suisse.

While Credit Suisse no longer counts as a Mega Bank- its share price had fallen over 95% from its Pre GFC high of CHF 83.19 to last Friday’s close at CHF 1.86, it was an integral player in the world of investment banking that includes a web of complex derivative transactions.

After last week’s move by the Swiss National Bank to provide Credit Suisse with CHF 50bn in cheap liquidity failed to stabilise sentiment in the equity and credit markets, regulators commenced work on plan B – to force UBS to buy out its smaller rival.

Latest developments

A few hours ago, it was announced that UBS would buy Credit Suisse for about CHF 3 billion or the equivalent of CHF 0.76 per share, sweetened by a $100 billion liquidity line from the SNB. The deal is priced at a significant discount to Credit Suisse’s closing share price on Friday of CHF 1.86. The Swiss Finance Minister noted, “this is a commercial solution, not a bailout.”

The announcement has met with the approval of ECB President Lagarde, and at this point, markets have responded positively in the early Asian session.

“I welcome the swift action and the decisions taken by the Swiss authorities. They are instrumental in restoring orderly market conditions and ensuring financial stability. The euro area banking sector is resilient, with strong capital and liquidity positions. In any case, our policy toolkit is fully equipped to provide liquidity support to the euro area financial system if needed and to preserve the smooth transmission of monetary policy.”

In reality, the only other option left available to solve the CSFB problem was for it to be nationalised by the Swiss Government. While the UBS-CSFB solution will help the European banking system, unsolved problems remain in the US.

As mentioned above, deposits at large, Systematically Important Banks (SIBs) in the US now carry a Fed guarantee, unlike deposits at regional banks. If this two-tiered system remains, it will encourage more deposit outflows from regional banks, and the crisis will continue. An unlimited deposit guarantee from the Fed would likely remedy this and end the latest banking crisis.

All of this comes at a cost

Banking crises are typically followed by increased funding costs, tighter regulation, and lending standards which slow loan growth and economic growth. Slower economic growth weighs on confidence, earnings, employment and stock valuations.

CSFB share price weekly chart

1. TradingView: the figures stated are as of March 20th, 2023. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation.