No Credit in the Bank
In a shocking turn of events, Credit Suisse – the second largest lender in Switzerland – has been acquired by UBS in a shotgun marriage on March 19, 2023. The failure of Credit Suisse has been attributed to a spill over of market fear caused by the default of regional banks in America, notably Silicon Valley Bank. Investors turned their attention to the European market, speculating on which bank would be the next to falter. With numerous scandals plaguing the Swiss lender, it was an easy target for speculators.
Credit Suisse had tried to transition into the investment banking styles found in the US and UK but this has only resulted in a series of scandals. The bank has been accused of allowing drug dealers to launder money, of giving loans to corrupt government officials in Mozambique, and more recently of allowing a massive data leak in 2022. Notably, Credit Suisse participated in an absurd situation where they surveilled former executive Iqbal Khan after he joined rival UBS. Due to the acquisition, Mr. Khan is now attempting to keep Credit Suisse bankers for UBS.
However, many banks of this size experience their fair share of scandals. What worried investors most was Credit Suisse’s underperformance – its revenues have fallen roughly 50% in the last ten years. This, coupled with rising interest rates and a general lack of confidence in the bank’s new management, made it an easy target. All eyes turned to the Saudi National bank, 9.9% shareholders of Credit Suisse. Ammar Al Khudairy, chairman of the Saudi National bank was asked if they would provide liquidity or further investment if Credit Suisse experienced more problems, to which Mr. Al Khudairy responded ‘absolutely not’. This seemed to be the straw that broke the camel’s back as Credit Suisse’s stock began to tumble after this interview.
Swiss regulators stepped in to force UBS to acquire Credit Suisse hoping to salvage as much value as possible from the failing banks as well as trying to reduce spill over effects. As part of the acquisition Swiss regulators promised common shareholders some form of compensation. Alternative Tier 1 (AT1) bonds were rendered worthless as a result of this ruling, which caused controversy among bondholders because it appeared to deny the widely held belief that debt is given priority over equity in bankruptcy. The central bank of the UK has condemned this decision and assured AT1 bondholders that they will hold preference over common equity in the event of a failure of a British bank. However, the Swiss regulators defended their decision citing the fact the AT1 bonds were created to absorb losses in this type of scenario.
The failure of Credit Suisse has shattered investors’ hopes that the banking crisis was limited to US regional banks. Attention has now turned to finding the next victim of the liquidity crisis. Deutsche Bank has come under fire but seems to have weathered a nervous period where its stock had dropped over 8% on one Friday. The stock rebounded over 4% on the following Monday. Central banks across Europe have also come out in defence of their banks citing the stricter regulations they adhere to compared to US banks. The ECB have also raised interest rates by 50 basis points. Although this may create further strain on the banking system, it is also a show of confidence that the banks can handle another hike in interest rates.