Financial Experts are Frantically Ringing Alarm Bells as, They Argue, the World Slides Towards a Major New Crisis Comparable to the GFC

Financial Experts are Frantically Ringing Alarm Bells as, They Argue, the World Slides Towards a Major New Crisis Comparable to the GFC

‘As bad as it gets’: Credit Suisse rescue deal sparks fears of full-blown banking crisis

Financial experts are frantically ringing alarm bells as, they argue, the world slides towards a major new crisis comparable to the GFC.

The controversial rescue deal for troubled lender Credit Suisse and the continuing fallout from the collapse of Silicon Valley Bank indicates the world is sliding into a crisis “far worse” than the GFC, one analyst has argued.

Following crunch talks aimed at stopping the stricken bank from triggering a wider international meltdown, Swiss bank UBS on Sunday agreed to take over its rival Credit Suisse for $US3.25 billion ($4.8 billion) – less than half its Friday closing valuation.

The deal, in which Switzerland’s biggest bank will take over the second-largest in the country, was vital to prevent irreparable economic turmoil spreading throughout the country and beyond, according to the Swiss government.

“This is as bad as it gets,” ACY Securities chief economist Clifford Bennett said in a note on Monday.

“A full banking crisis has suddenly rushed across the horizon toward us. Not only was Credit Suisse revalued over the weekend at half its Friday market close, such valuation required the zeroing of many bondholders’ stakes and massive government guarantees on losses UBS might suffer as a result of this purchase of Credit Suisse.”

Under the emergency deal, holders of $US17 billion ($25 billion) worth of Credit Suisse bonds – so-called additional tier one (AT1) bonds, a riskier class of bank debt – were written down to zero.

The surprise move is expected to cause chaos in European debt markets when they open on Monday and is likely to lead to a sell-off of other bank debt, with one banker telling the Financial Times the decision could lead to “nightmare” given bondholders were having heavier losses forced on them than shareholders.

“The market is likely to be shocked by such a blatant inversion of the hierarchy of creditors and by the decision to sweeten an equity deal at the expense of bondholders,” Jerome Legras, head of research at Axiom Alternative Investments, told the newspaper.

Mr Bennett warned the world was “now in the realms of a full-blown historic crisis” where “regardless of what the authorities do, investors will simply want out”.

“Not only are investors now totally spooked, but as this news spreads, some depositors in some banks across Europe and the US will be looking to withdraw their funds,” he said.

“This is now far worse than the Global Financial Crisis. We are truly teetering on the edge of a very deep abyss indeed.”

He said while banks, economists and strategists around the world would today be “talking about how these developments and actions by authorities will stabilise markets and reassure depositors”, they were “talking their books”.

“They are talking their very own survival,” he said.

“We have never been this close to a full-on run on multiple banks. Fractional banking issues have always been there, but they have now entered the mainstream conversation front and centre. The previous leveraged upside is now turning into leveraged downside risk. It is very likely that stocks in general will also be sold off.”

The Australian share market plummeted sharply on Monday, with the ASX200 index closing down 1.4 per cent at 6898.50 points, a four-month low.

Axel Lehmann, left, and Colm Kelleher. Picture: Fabrice Coffrini/AFP

Axel Lehmann, left, and Colm Kelleher. 

‘Best solution’

The Credit Suisse deal was welcomed in Washington, Frankfurt and London as one that would support financial stability, after a week of turbulence following the collapse of two US banks.

After a dramatic day of talks at the finance ministry in Swiss capital Bern – and with the clock ticking towards the markets reopening on Monday – the takeover was announced at a press conference.

Swiss President Alain Berset was flanked by UBS chairman Colm Kelleher and his Credit Suisse counterpart Axel Lehmann, along with the Swiss finance minister and the heads of the Swiss National Bank (SNB) central bank and the financial regulator FINMA.

The wealthy European nation is famed for its banking prominence and Mr Berset said the takeover was the “best solution for restoring the confidence that has been lacking in the financial markets recently”.

If Credit Suisse went into freefall, it would have had “incalculable consequences for the country and for international financial stability”, he said.

Credit Suisse said in a statement that UBS would take it over for “a merger consideration of three billion Swiss francs”.

After suffering heavy falls on the stock market last week, Credit Suisse’s share price closed Friday at 1.86 Swiss francs, with the bank worth just over $US8.7 billion ($13 billion).

UBS said Credit Suisse shareholders would get 0.76 Swiss francs per share.

“Given recent extraordinary and unprecedented circumstances, the announced merger represents the best available outcome,” Mr Lehmann said.

Finance Minister Karin Keller-Sutter said that bankruptcy for Credit Suisse could have caused “irreparable economic turmoil” and “huge collateral damage” for the Swiss financial market, not to mention the “risk of contagion” for other banks, including UBS itself.

The takeover has “laid the foundation for greater stability both in Switzerland and internationally”, she said, insisting it was “a commercial solution and not a bailout”.

The deal was warmly received internationally, with European Central Bank chief Christine Lagarde welcoming the “swift action”. She said the decisions taken in Bern “are instrumental for restoring orderly market conditions and ensuring financial stability”.

US Federal Reserve chair Jerome Powell and Treasury Secretary Janet Yellen said in a joint statement, “We welcome the announcements by the Swiss authorities today to support financial stability.”

The sentiment was echoed by British Chancellor of the Exchequer Jeremy Hunt.

Meanwhile, the US Federal Reserve and the central banks of Canada, Britain, Japan, the EU and Switzerland announced on Monday they would launch a co-ordinated effort to improve banks’ access to liquidity, hoping to calm worries rattling the global banking sector.

The RBA says Australia’s bank’s are ‘unquestionably strong’.

The RBA says Australia’s bank’s are ‘unquestionably strong’.

Regional banks at risk

It comes amid warnings that nearly 200 banks in the US are as vulnerable to the same fate as Silicon Valley Bank (SVB). The study published on the Social Science Research Network identified 186 banks that could fail if half their depositors withdraw their funds quickly.

US authorities inadvertently triggered a squeeze on regional banks last week by announcing a de facto bailout of SVB depositors, waiving the $US250,000 ($370,000) insurance cap to fully protect all customers.

Ms Yellen was grilled by Oklahoma Republican Senator James Lankford during a Finance Committee hearing on Thursday, where she appeared to confirm the existence of a two-tier system under the Federal Deposit Insurance Corporation (FDIC).

“Will the deposits in every community bank in Oklahoma regardless of their size be fully insured now? Will they get the same treatment that SVB or Signature Bank just got?” Mr Lankford asked.

“A bank only gets that treatment if a [supermajority] of the FDIC board, a supermajority of the Fed board, and I in consultation with the President determine that the failure to protect uninsured depositors would create systemic risk and significant economic and financial consequences,” Ms Yellen replied.

Ms Yellen appeared unable to answer how the government planned to prevent large depositors from moving their funds out of community banks into the big banks.

“Look, I mean, that’s certainly not something that we’re encouraging,” she said.

Mr Lankford replied, “That is happening, right now … it’s happening because you’re fully insured no matter what the amount is if you’re in a big bank, you’re not fully insured if you’re in a community bank.”

Meanwhile, as news broke overnight of the Credit Suisse rescue plan, Reserve Bank assistant governor Chris Kent insisted Australia’s banks were “unquestionably strong” and that local financial markets were more volatile but “are still functioning”.

“Conditions in global bond markets have been strained recently following the failure of Silicon Valley Bank in the US,” Dr Kent said in a speech on Monday morning, The Australian reported.

“Volatility in Australian financial markets has picked up, but markets are still functioning and, most importantly, Australian banks are unquestionably strong – the banks’ capital and liquidity positions are well above APRA’s regulatory requirements.”

Associate Professor Mark Humphery-Jenner from the School of Banking and Finance at UNSW Business School said he agreed with the RBA that Australian banks “are fundamentally stronger than Credit Suisse or the US regional banks”.

“The reason for that is regulation,” he told

“The prudential regulation ensures banks aren’t taking excessive risks and hedging where necessary. Banks in Australia are fundamentally stronger from a prudential perspective.

“Furthermore given Credit Suisse’s main issue was profitability and its scandal-plagued nature, Australian banks are better than Credit Suisse in generating profits.”

In terms of fallout, Prof Humphery-Jenner said the Australian banking system would likely benefit from the rescue deal because Credit Suisse failing “would have created a lot of market turmoil”.

But he warned it may put further valuation pressure on the already shaky US regional banks. “Credit Suisse was acquired for $US3.2 billion – First Republic was trading at $US4.5 billion,” he said.

Prof Humphery-Jenner said that raises the question, “Why is First Republic, a regional household bank that doesn’t have a global footprint, worth more than Credit Suisse, a global systemically important bank?”

Billionaire Elon Musk has warned that a regional bank wipe-out could trigger disastrous consequences.

The Twitter chief executive was agreeing with the assessment from financial website Zerohedge that if the Fed “does not contain the regional bank collapse, there will be another Great Depression”.

“Small/medium banks account for 50 per cent of US commercial and industrial lending, 60 per cent of residential real estate lending, 80 per cent of commercial real estate lending, and 45 per cent of consumer lending,” Zerohedge wrote on Twitter.

“This is a serious risk,” Mr Musk said.

Prof Humphery-Jenner agreed a regional bank failure “would create some significant issues”, namely a major liquidity crunch as access to loans dried up.

“It would absolutely be very, very disruptive and very bad news if the regional banks start falling over – supporting them is a priority,” he said.

“The banking system seems to be moving at a very rapid pace at the moment. While we can think a bank might be stable and solvent today, new information can emerge tomorrow to change that.”


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