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The Credit Suisse acquisition and what it means for global financial markets.

As of March 2023, it has been agreed UBS, one of Credit Suisse’s main competitors in Switzerland, is set to acquire the bank after its steady decline since 2021 for 3.3 billion US dollars.

UBS has stated that the combination is expected to create a business with more than USD 5 trillion in total invested assets and sustainable value opportunities. However, with the merger carrying many risks due to the actions of Credit Suisse previously such as their riskier investments it is hard to accurately predict all the implications that can occur globally on financial markets in the coming months.

What has led to Credit Suisse’s decline?

Firstly, in early 2020 and 2022 various misconduct scandals led to then CEO Tidjane Thiam and Chairman Antonio Horta-Osorio respective resignations. Naturally this only exacerbated financial problems that they have been facing since 2020. For example, the collapse of Archegos Capital and Greensill Capital causing a $1 billion dollar loss and management re-evaluation. Rumours of collapse in July/August 2022 made investors back out $119 billion in the last quarter of the year whilst they were already suffering its biggest annual loss of 7.29 billion Swiss Francs since the financial crisis. And finally at the start of this year there was both Credit Suisse saying they would borrow $54 billion to shore up liquidity but Saudi National Bank (who was the main backer) could not lend the money due to regulation impediments, there was also the collapse of Silicon Valley Bank and Signature Bank, both events making financial institutions apprehensive. This has all contributed to the executives agreeing on the buyout without shareholder approval.

Even though it has been labelled by the Swiss government that the Credit Suisse deal is not a bailout, as that may give an indication that the failures of big private banks become a taxpayer’s obligation, it has already been labelled that by some in the industry. More specifically it has been said that the Swiss National Bank (SNB) will offer loans up to $108 billion for liquidity assistance to UBS as well as offer to absorb some of the losses that will be incurred by the merger. All of which to reduce the impact on the wider financial system.

Some affects have already been seen following the buyout. Many major banks as well as the Federal Reserve have increased their access to US dollar liquidity, which is a response seen in market turmoil. This is important as it provides foreign central banks the capacity to give US dollar funding to institutions within their respective countries when there is market stress. Credit Suisse also had risky investment assets such as collateralized debt obligations, this is a bad indication to other banks with similar assets as those stocks could drastically drop. There is also unease in how this will affect emerging markets such as Brazil, Indonesia, and Mexico, where they are still doing business. Market trends in Asia have seen a downturn, particularly Honk Kong shares hit a 3-month low. This buyout will have a lot of severe implications on these economies if it doesn’t manage to change the direction of these market trends.

It is still unclear the full affect the acquisition will have on global markets and how well risks within the company will be managed during the restructuring process, but with the aid of the SNB, financial institutions alike will likely be keeping an eye on the actions from UBS in the coming months.

Bailout: A bailout is when a business, an individual, or a government provides money and/or resources to a failing company.
Collateralized debt obligations (CDO): a particular type of derivative, backed by a pool of loans and other assets and sold to institutional investors. These assets become the collateral if the loan defaults.
Shore up liquidity: A process to improve an institution’s financial position by either reducing liabilities or acquiring assets.

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