The global financial industry has been through several crises since 2008 that have affected the world economy. Once again, the industry is giving the same signals as two major American banks, Silicon Valley Bank and Signature, announced closures in the last two weeks.
Despite the US government’s interventions and messages to calm down financial volatility, financial turbulence continues unabated, with the crisis deepening and spreading to the European continent.
As analysts voice concerns about the rising cascading effect, the latest victim of the US-emerged financial crisis was Switzerland’s Credit Suisse bank.
After facing drastic losses in the stock market, the Switzerland National Bank (SNB) decided last week to pump over $50 billion into Credit Suisse depositors. It failed to stop the financial bleeding, however.
Two scenarios were possible to save Credit Suisse. The first one was to face the same fate as others and close down the entire operation. But international players and Swiss authorities did not want to gamble on the consequences of bankruptcy that might be devastating for other banks in the European continent.
The second, less risky scenario, was nationalisation or a merger with another banking giant. After negotiations over the weekend, the Swiss government brokered a deal with the country’s biggest bank, UBS Group, which agreed to acquire rival Credit Suisse for 3 billion Swiss Francs ($3.23 billion).
The impact on global markets
The buyout strategy is seen to provide the much-needed capital and resources to Credit Suisse, but financial indicators paint a gloomy forecast for global markets in the coming days, experts predict.
Following the buyout, major central banks, including the US Federal Reserve, announced a coordinated effort to increase access to dollar liquidity.
One of the problems with Credit Suisse was making risky investments in assets such as collateralised debt obligations, a credit product tool that collects assets for institutional investors, and other derivatives. This type of asset is a red flag for other banks that have similar investments, and their stocks could plummet.
It also casts doubt on whether the buyout will give the bank breathing space in emerging markets such as Brazil, Mexico, and Indonesia, where it is still doing business.
Stocks saw a downward trend in Asian markets on Monday, where Hong Kong shares hit a three-month low and Bank of East Asia shares dropped more than 4 percent.
If the buyout won’t be able to change the downturn direction in the global markets it might have serious implications for those economies.
The merger is carrying a risk of potential job losses as the new administrative structure will take place in the company and cut costs.
It may also trigger local layoffs in Switzerland in which companies had investments in the bank. That also may spill over to other countries in business with the bank.
Ed Yardeni, president of Yardeni Research, a sell-side consulting firm providing a wide range of global investment strategies, said the banking turmoil might cause a recession if it sets off a credit crunch.
The buyout of Credit Suisse is a sign of consolidation in financial industries and may offer stabilization in the markets. But it also will curb global economic diversity and competition.
The procurement of the Swiss bank may have a more negative effect on the financial system if the buyout fails to be efficient for markets. This will also depend on UBS’s potential debt credit in financing the acquisition.
The question still persists whether multibillion-dollar bank procurement will address global financial issues and will provide lifeline support for the markets in an atmosphere of Fed’s rate uncertainty.