There was great hope: the emergency takeover of Credit Suisse by the major Swiss bank UBS should bring calm to the financial markets. “The Federal Council is convinced that the takeover is the best solution to restore confidence,” said Swiss President Alain Berset when announcing the most important bank merger in Europe since the financial crisis 15 years ago. But fears of a banking crisis, also as a result of the turbulence in the USA, continue to smolder on the financial markets.
Is there peace now?
“A zombie is gone, but a monster is emerging,” commented the “Neue Zürcher Zeitung” on the takeover of Credit Suisse by UBS. After the financial crisis of 2008/2009, no bank should be so big that the state couldn’t let it go bankrupt (“too big to fail”). “With this merger of two banks that were already systemically important, we get an even bigger player that certainly shouldn’t go bankrupt,” criticizes Gerhard Schick from the citizens’ movement Finanzwende. “This solution is not sustainable and only exacerbates the too-big-to-fail problem,” says the former Green Party politician. In addition, the situation in the US banking sector remains tense after the collapse of the Silicon Valley Bank and the problems of other regional banks. This causes unrest on the stock exchanges, which initially stabilized on Monday.
How are the German banks doing?
The German banking sector is currently comparatively robust. The two large institutes, Deutsche Bank and Commerzbank, recently made billions in profits again after a tough restructuring. You will also benefit from the turnaround in interest rates. As a result, banks, for example, earn more on loans again. At the same time, however, rising interest rates are causing price losses on the markets, for example for government bonds. The result is billions in write-downs on securities holdings that institutions consider temporary.
Savings banks and cooperative banks felt the effects of this last year. The price losses become a problem above all when institutions sell the paper before the end of the maturity period. The savings banks usually hold the paper until maturity, assured the President of the German Savings Banks and Giro Association (DSGV), Helmut Schleweis, recently. In addition, cooperative banks and savings banks have their own safety net in case an institute gets into difficulties.
What are other reasons for investors’ continued concerns?
Banks, insurers and other investors have put a total of CHF 16 billion (EUR 16.2 billion) in subordinated bonds from Credit Suisse (known as AT1 paper). At the behest of the Swiss financial regulator Finma, this money is to be added to Credit Suisse’s equity, and the holders of these papers lose the money they invested. It was initially unclear which large investors were threatened with higher defaults as a result. According to its own information, Deutsche Bank is “almost zero” affected, according to a spokesman Commerzbank not at all. The banking supervisors of the European Union made it clear that in the event of a bank in distress in the EU, there would be a fixed rule as to the order in which shareholders and other creditors would be called upon. A bank’s losses were initially at the expense of its share capital. AT1 bonds would only be used if this was not sufficient.
Were the right lessons learned from the Lehman bankruptcy?
During the financial crisis following the bankruptcy of the US bank Lehman Brothers, the EU countries alone had to invest around 1.6 trillion euros in ailing banks. Since then, banks have had to show significantly more equity. In addition, since 2016 in Europe, if an institution gets into trouble, owners and creditors have been asked to pay first. Deposits from savers and money from a crisis fund financed by the banks (Single Resolution Fund) are only used as a last resort. Economist Jens Südekum does not expect any contagion effects within the industry like in 2008. “The equity ratios are better and there are hardly any bad loans anymore,” said the member of the scientific advisory board at the Federal Ministry of Economics of the “Bild” newspaper (Monday).
Critics do not consider the current provisions to be sufficient. “The failure of Credit Suisse is a wake-up call to finally push through important financial market reforms,” demands Schick. Among other things, larger capital buffers at banks and a European resolution and deposit protection authority with more powers are necessary.
How are the central banks reacting?
The central banks are trying to calm down – verbally and with a concerted action. “Due to its strong equity and liquidity positions, the banking sector in the euro area is resilient,” affirmed ECB President Christine Lagarde at the weekend. In addition, the six major central banks increased the pace of supplying the financial system with dollar liquidity. The dollar transactions are intended to ensure that the banks do not run out of the world reserve currency, the dollar, for important, mostly international transactions. In addition to the ECB, the central banks of the USA, Canada, Great Britain, Japan and Switzerland participated.
How are the reactions to the deal in Switzerland?
In addition to a certain relief, the public reaction is characterized by criticism and concerns. The liberal FDP said what happened to Credit Suisse was a disgrace for Switzerland. The main concern is the reputation of the Swiss financial center. The government invoked emergency law when it took over. Law professor Peter Kunz, who specializes in banking law, considers this to be an inadequate legal basis and expects lawsuits to be filed against the Confederation. “The fact that CS shareholders are no longer asked about the deal is a completely extra-legal regulation,” he said in newspaper interviews.
What are the consequences for CS customers and staff?
According to the Financial Market Authority, Credit Suisse can continue to conduct all transactions without restrictions. This ensures the protection of customers. Accounts, custody accounts and other services remained accessible as usual. The customers’ money is protected by the bank’s liquidity and by the deposit guarantee, which applies to amounts of up to CHF 100,000. Uncertain times are coming for the 50,000 employees of CS. Around 10,000 jobs could be threatened.
When will the deal be legally closed?
The merger transaction is subject to customary closing conditions. Both parties are confident that all conditions can be met, it said. If possible, the merger should be completed by the end of 2023. The Credit Suisse name may be retained in the future.
