‘So much for 13 years of banking regulation. Swiss authorities on Sunday organized the shotgun wedding of UBS and Credit Suisse to avert a failure of the latter—exactly the panicky too-big-to-fail rescue we were told new rules post-2008 would prevent.
Switzerland’s second-largest bank (after its new owner) has been plagued for years by poor management. Depositors lost faith over the past year, withdrawing some 160 billion Swiss francs ($173 billion) in 2022 and up to 10 billion Swiss francs a day last week, according to media reports. After Silicon Valley Bank’s failure in the U.S., attention quickly turned to Credit Suisse as the weakest link in Europe, and its share price fell while the cost of insuring against a default spiked.
Yet what Swiss and other regulators have done is far different from what they promised voters and taxpayers after 2008. Authorities appear to have browbeaten UBS into offering three billion Swiss francs in an all-shares deal to buy Credit Suisse—up from an initial offer reported to have been about a billion francs.
That’s less than half of Credit Suisse’s market value as of Friday. Swiss taxpayers will be on the hook to guarantee nine billion francs of UBS’s potential losses on “difficult-to-assess assets.” The Swiss central bank will offer 100 billion francs in liquidity assistance.
In the biggest insult to the market, regulators will allow this deal to proceed without a vote of either bank’s shareholders. Credit Suisse’s owners faced losing all their equity in a bankruptcy, but they’re still entitled to ask whether the deal fairly values their stakes if the bank can survive in some form.
As for UBS shareholders, they’re now being punished for the discipline they imposed over the years to turn UBS into a healthy bank by being saddled with managing a failed rival. They also face more regulatory scrutiny and compliance costs now that their bank has grown far bigger. Congrats.
Authorities justify all this by highlighting the systemic risk in Switzerland and beyond of allowing Credit Suisse to collapse into bankruptcy. That danger is debatable. Credit Suisse was an outlier even in a week that saw bank stocks sell off around the world, meaning investors may have seen limited contagion risk. A European Central Bank official Thursday said no eurozone bank was imperiled by Credit Suisse’s travails, and media reports suggested counterparties were taking steps to limit their exposure.
Wasn’t eliminating the systemic risk posed by larger banks the point of beefed up regulation after the last panic? Credit Suisse boasted healthy capital-adequacy and liquidity ratios under post-2008 banking rules, and it had completed or was in the process of preparing “living wills” with regulators around the world to manage an insolvency. Those plans didn’t contemplate a forced sale to an unwilling rival, yet that’s the fix officials reached for in the pinch—as they always do, with ample taxpayer cash to sweeten the deal.
This weekend’s rescue is a warning that two weeks into the current banking panic the post-2008 rule book already has failed. Taxpayers are on notice that the solution to any crisis will be to amplify too-big-to-fail rather than reducing it—as it was the last time around. Hang onto your wallets.’
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