Credit Suisse saved again 🛟

And just like that, Credit Suisse is bought by Switzerland's biggest bank, UBS, calming fears of another global banking crisis (for now).

21 Mar

“I’m glad I’m not perfect – I’d be bored to death.”wavy

– Louise Fitzhugh, Harriet the Spy 

👋 Friends, Rallie here. Your local crypto, finance, and tech sleuth. 

On the menu:

  • 🤝 UBS buys Credit Suisse

  • 🗞️ Headlines that hit

  • 🏦 Refresh: banks & bonds

  • 💯 Top tweets

The Rallie Recap

🤝 And just like that, Credit Suisse is bought by Switzerland's biggest bank, UBS, calming fears of another global banking crisis (for now).

  • This week, Swiss banking giant, UBS, agreed to acquire its rival Credit Suisse in a deal valued at ~$3B USD that will merge together Switzerland’s two biggest banks.

  • The news came just days after the Swiss National Bank declared Credit Suisse solvent after offering the bank a $54B USD credit line.

  • Swiss regulators had been urging the two banks to come to an agreement over the weekend to strengthen confidence in the banking system and calm panic in global financial markets that was triggered by the failure of US-based Silicon Valley Bank and Signature Bank.

  • As we wrote last week, Credit Suisse had been losing the trust of investors and customers for years, and in 2022, recorded its worst loss since the 2008 global financial crisis.

  • Confidence collapsed last week after the bank sought help from the Swiss government after revealing it had found “material weakness” in its financial situation.

  • Amid fears of another 2008-style banking crisis, former deputy Bank of England governor, Sir John Gieve, had this to say, “Credit Suisse is like Lehman Brothers in terms of scale and complexity and importance but there’s a big difference: if you remember, the Americans didn’t save Lehman Brothers.” noting the support behind Credit Suisse was a key difference to that of Lehman Brothers.

  • So, how big is Credit Suisse? The Swiss bank has been widely regarded as “too big to fail” by experts as it primarily serves wealthy clients and businesses rather than the everyday person. And as Europe’s 17th largest lender by assets, it's deemed systemically important to the global financial system.

Headlines That Hit

Rallie Refresh: Banks & Bonds

By now, we know that banks make money by lending money. And at the centre of the news lately? Banks investing customer funds into bonds. So, let's break down how this relationship works and where it can go wrong👇:

  • Financial institutions often use customer deposits to invest in various securities, including bonds, to earn a return on their funds.

  • Longer-term bonds typically offer higher interest rates compared to shorter-term bonds, which can be attractive to financial institutions looking to maximize their returns.

  • However, investing customer deposits into longer-term bonds can create a mismatch between the maturity of the bonds and the liquidity needs of the financial institution's depositors. 

  • If a financial institution needs to quickly access funds to meet withdrawal requests (like in Silicon Valley Bank's case), but has invested those deposits into long-term bonds, they may be forced to sell the bonds at a loss or pay early withdrawal penalties to meet the liquidity needs of their customers.

  • This can result in significant losses for the financial institution and erode customer trust in the institution's ability to safeguard their deposits (also like in Silicon Valley Bank's case).

  • Ultimately, a bank must carefully manage their investment portfolios and balance the desire for higher returns with the need to maintain sufficient liquidity to meet the needs of their customers....so that they don't end up like Silicon Valley Bank.

Trending Tweets 

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DISCLAIMER: This is not financial advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions.