UBS has agreed to buy Credit Suisse for $3.2 billion in a deal that had the blessings of Swiss regulators. Amid the banking crisis, agencies have been scrambling to instill confidence in the banking system.
Over the weekend there were reports that UBS wanted to buy Credit Suisse for only about $1 billion which was only a fraction of the company’s market cap. While even the $3.2 billion price tag is considerably below the company’s current market value, the deal would help fend off a major crisis in Swiss banking.
As part of the deal, the Swiss government would provide a backstop of over $9 billion for potential losses that UBS might suffer after acquiring Credit Suisse.
UBS agrees to buy Credit Suisse
Also, the Swiss National Bank also pledged a loan of almost $108 billion to facilitate the deal. As part of the takeover conditions, Credit Suisse stockholders would receive 1 UBS share for every 22.48 Credit Suisse shares that they hold.
Commenting on the deal, UBS Chairman Colm Kelleher said, “This acquisition is attractive for UBS shareholders but, let us be clear, as far as Credit Suisse is concerned, this is an emergency rescue. We have structured a transaction which will preserve the value left in the business while limiting our downside exposure.”
The banking crisis has deepened
The baking crisis has deepened after the collapse of SVB and Signature Bank. US regulators provided a full backstop to depositors of both banks which ensures that even the unsecured depositors don’t lose money.
SVB faced the typical “bank run” as depositors scrambled to move their funds away from the troubled bank. Its cash balance with the Fed went negative after depositors withdrew $42 billion in a single day. Its capital raise plan also went into limbo amid the crash in its stock price.
Notably, 89% of SVB’s total deposits were in excess of the FDIC’s (Federal Deposit Insurance Corporation) limit of $250,000.
The crisis has also spread to some of the other banks and First Republic stock has also crashed despite major banks infusing $30 billion in deposits into the troubled lender. The S&O downgraded First Republic’s ratings by three notches to B-plus and warned of further downgrades.
Swiss regulators back UBS’s takeover of Credit Suisse
The crisis from Credit Suisse risked spreading into other countries also given the lender’s global reach. Speaking about Credit Suisse, Switzerland’s financial regulator Finma said there was a “risk of the bank becoming illiquid, even if it remained solvent, and it was necessary for the authorities to take action in order to prevent serious damage to the Swiss and international financial markets.”
Swiss finance minister Karin Keller-Sutter meanwhile clarified that UBS buying Credit Suisse was a “commercial solution” and not a “bailout.”
The US welcomed the deal between UBS and Credit Suisse
In the US also, Treasury Secretary Janet Yellen, who had previously ruled out a bailout for SVB said that the uninsured deposits might not be protected in future bank failures.
Meanwhile, the US has welcomed UBS buying Credit Suisse and Yellen and Fed chair Jerome Powell said in a statement, “The capital and liquidity positions of the U.S. banking system are strong, and the U.S. financial system is resilient. We have been in close contact with our international counterparts to support their implementation.”
Saudi Arabia also offered a proposal for Credit Suisse
The Wall Street Journal reported that a group of investors including Saudi National Bank offered a proposal to inject $5 billion capital into Credit Suisse to bail out the troubled bank. However, sources said that Swiss ministers rejected the offer.
Last year also, Saudi Arabia invested in Credit Suisse but amid the recent crisis, it said publicly that it won’t put more funds into the bank.
The banking crisis might spill over to the economy
The global, especially the developed economies are anyways battling recession fears amid deteriorating economic activity. Troubles at the banking sector might further impact growth.
Jim Cramer believes that regional banks are still vulnerable. He however said that markets “dodged a major bullet” amid the quick action by federal agencies. Cramer added that the US might have headed for a “full blown” recession if not for the timely intervention.
Notably, recession fears have risen and Jeffery Gundlach said that a recession looks “imminent” looking at the steepening of the yield curve. Incidentally, the US yield curve has now been inverted for months which many see as a recession warning.
Meanwhile, many market participants believe that amid the troubles at regional banks, the Fed might take a dovish stance. Gundlach said that the Fed might raise rates by 25 basis points in March to save its “credibility” but would pause thereafter.
Goldman Sachs believes that the US Fed would not raise rates at its upcoming March meeting. That said, Goldman still expects the Fed to raise rates by 25 basis points each in May, June, and July which would take the Fed fund rates to between 5.25%-5.50%.
Ed Hyman of Evercore ISI believes that the Fed should take a breather on rate hikes for now. Here it is worth noting that Powell has said multiple times that the US central bank is committed to lowering inflation to its targeted 2%.
Crisis at Credit Suisse and US regional banks could impact Fed decision
Expectations from Fed’s meeting this week have whipsawed. The collapse of SVB and Signature Bank in the US, and the near failure of Credit Suisse might impact Fed’s March rate hike decision.
Along with restoring price stability and lowering inflation to its targeted 2%, the Fed now has another task to restore public faith in the banking system.