The historic shotgun takeover of the 166-year-old Credit Suisse by its biggest rival, UBS, has wiped out a chunk of the lender’s market value and fanned fears about the health of global banking stocks. The Swiss government has engineered the deal to contain the spread of a crisis that has begun to engulf significant lenders worldwide.
Despite the state backing, shares fell sharply Monday in Europe and worldwide. It reflects investors’ fears that rising interest rates and a weak economy weaken the financial system.
Investors are concerned that banks must be more recapped and prepared to cope with additional strains from a slowing global economy, high inflation, and an increasing oil price. They also fear that a bank run could erupt if depositors cannot withdraw funds from failing institutions.
On Thursday, the Swiss central bank lent Credit Suisse up to 50 billion Swiss francs ($54 billion) to bolster confidence, sending the lender’s shares surging. That’s a turnaround from a day earlier when the lender’s shares tumbled 30% after its biggest shareholder said it would not inject more capital into the firm.
The Swiss bank, which traces its roots back through some 370 separate institutions, has emerged from a state bailout during the 2008 financial crisis as one of the world’s most prominent wealth managers. It’s core wealth management business has benefited from a massive increase in demand for services in the past few years, and it now has assets of around $1.9 trillion.
However, Credit Suisse faces several challenges as it joins UBS and consolidates its position in the Swiss banking market. First, the deal will require the bank to close down its investment bank, which has racked up losses in recent years and is likely to result in a mass layoff of its staff.
Meanwhile, the merged firm will appoint its chief executive. Whether the appointment will be for an existing executive or a new hire is still being determined.
It will be too soon to know how many employees will lose their jobs. But a memo to staff seen by Reuters said the job cuts would be “commensurate” with market practice, and they would be paid their bonuses under existing arrangements.
But the job cuts will be a massive shock for the firm, which has risen from small beginnings to become a juggernaut of international finance with operations in 190 countries. Its most significant business is the wealth management division, which caters to the world’s elite.
Nevertheless, despite the turbulence, UBS is not expected to be subjected to a similar crisis that hit its peers during the financial crisis of 2008. Lord Turner, who headed up the UK’s financial watchdog then, told The Sunday Times on Monday that he does not think we will see another banking crisis.