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Why Is UBS Buying Its Rival Credit Suisse?

Plus500 | Monday 20 March 2023

Silicon Valley Bank’s collapse on Friday, March 10th, which was deemed the biggest banking bankruptcy since the 2008 financial crisis, has certainly sent ripples across the overall banking landscape. Many big names in the banking and financial services industry fell in response as banks like Silvergate Capital and Signature Bank collapsed as well. 

As a result, this may have increased investors’ and traders’ worries about the fate of other banks with the latest being Credit Suisse (CSGN.VX), Switzerland’s second-biggest bank falling by over 72% since SVB’s historic bankruptcy. However, Credit Suisse’s drop was not the only hurdle along this bank’s way as it was also revealed yesterday that UBS, one of its competitors, will purchase Credit Suisse in an emergency deal. So what could have led to this emergency purchase, what has happened recently to Switzerland’s oldest bank, and what could this mean for the banking sector in general? Here’s what you need to know:

Switzerland's Flag Waving on a Blue and Cloudy Sky Background

Why Is Credit Suisse Falling?

As mentioned above, since SVB’s fallout on March 10th, Credit Suisse wiped out a significant 72.11% of its value. This whopping fall could be attributed to the fact that many investors, traders, and market watchers appeared to be anxious about the banking sector’s future. The jitters were also intensified by Credit Suisse’s announcement that it has found some “material weakness” in its finances and the Saudi National Bank, Credit Suisse’s largest investor revealing that it would no longer deposit funds into the Swiss bank. 

Following these surprising revelations, Credit Suisse received an emergency bailout of $54 billion from Switzerland’s central bank. Nonetheless, despite the hefty emergency fund, traders may have still been apprehensive about the bank’s trajectory and the banking sector’s overall health. 

After a tumultous and less-than-stellar week from the banking sector, it was announced on Sunday the 19th, UBS Group (UBSG.VX), Switzerland’s biggest bank and one of Credit Suisse’s rivals is purchasing the latter for $3.23 billion. (Source:Yahoo Finance)

UBS to the Rescue 

Sunday may have marked an important day for the markets as UBS announced that it would purchase the bank in an emergency response to the ongoing banking crisis and ensuing fear and uncertainty which have generated ostensible market volatility over the past week and caused many to shy away from banks’ stocks. The emergency appeal, therefore, came against the backdrop of the Swiss bank’s fall, its recent gloomy financial announcement, and the fact that the bank still fell in spite of the Swiss National Bank’s $54 billion bailout fund. In addition, the emergency purchase also sought to calm market nerves following SVB and other major banks’ collapse. 

Accordingly, the purchase was received with open arms by the Fed and the Swiss National Bank with open arms as the latter commented on this purchase on Sunday by stating that it would “secure financial stability and protect the Swiss economy in this exceptional situation.” It was also reported that the Swiss National Bank will also be able to provide UBS with a loan of up to $108 billion. Moreover, Fed chair, Jerome Powell along with Treasury Secretary, Janet Yellen, stated that this purchase would improve the Swiss economy’s financial stability which would also be supported by the US. 

How Is the Market Reacting?

While Credit Suisse may have been failing to sustain investors’ confidence for a few years now, it seems that Sunday’s announcement still shocked the markets as the Swiss bank fell by an astounding 62.3% since Friday, as of the time of the writing. Similarly, despite the fact that UBS is the one saving Credit Suisse from its woes, it appears that the market is still cautious about the banking sector as even UBS fell by 15.4% since the emergency purchase and as of the time of the writing. 

This downtrend was not only observed in Switzerland but was also spread across a myriad of financial markets around the world as Hong Kong’s Heng Seng Index (Hong Kong 50) fell by 2.65% on Monday morning while the Nikkei 225 (Japan 225) dropped by 1.42% as of the time of the writing. In addition, stocks from Germany, France, and the UK also suffered losses on Monday as the market attempted to digest the recent news and the losses observed across the various market sectors.

As many traders and investors may be seeking refuge from the ongoing market turmoil and uncertainty, they may want to keep an eye on the upcoming Federal Reserve rate decision on Wednesday and the Bank of England’s (BoE) decision on Thursday to see how the recent escalations in the banking sphere will affect their interest rates decisions. 


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