As we reported on Monday, the collapse of Swiss banking giant Credit Suisse sent shock waves through global stock markets that are still reverbrating. Banking and finance corportions experienced a sharp drop in value following the announcement by Swiss authorities that troubled Credit Suisse would be taken over by UBS Group. In an effort to prevent an international banking crisis, central banks took action to alleviate concerns, the UK’s Daily Mail reported.
In premarket trading today, Credit Suisse shares continued to fall, now having dropped 60.5% since news of the bank's financial troubles broke at weekend. When markets opened this morning they hit a new low while UBS itself experienced an 8% loss. These movements came after a frenetic dumping of European banking shares on Asian markets, where what little investor confidence there had been in official measures to contain a banking crisis evaporated quickly, the report continued.
On Sunday, after a cash injection of €54billion by Switzerlands Central Bank had failed to save the retail banker, the most notable intervention since the global financial crisis of 2008 occurred, with UBS acquiring Credit Suisse for 3 billion francs ($3.2 billion) in a sudden merger, and the world’s leading central banks committing to daily dollar funding offerings. In a deal orchestrated by Swiss regulators, UBS Group AG agreed to take over the 167-year-old Credit Suisse Group AG and absorb potential losses of up to $5.4 billion, said the outlet.
The
central banks of the world announced coordinated actions to stabilize
banks. They also provided access to a loan facility that allows banks to
borrow dollars from the United States if needed, which was a common
practice during 2008’s crisis. However with the status of the US$ as global reserve currency no longer assured, a repeat of that policy may not guarantee the same result.
The
UBS acquisition has caused investors to focus on the huge financial
loss that Credit Suisse bondholders will suffer. This has increased
anxiety about key risks such as contagion and the fragility of U.S.
regional banking systems, said the report. There is also a continuing concern about the financial health on mant banks in the European Union.
Key player in the deal to save Credit Suisse were the central bank of Switzerland, the Swiss National Bank. That’s the very same central bank that had quietly bailed out UBS, the new owner of Credit Suisse, during the financial crisis of 2008 with the assistance of similar dollar swap lines from the Federal Reserve (the “Fed”) – the central bank of the U.S.
In 2011, following an audit of its activities by the Government Accountability Office into its activities the Federal Reserve “In October 2008 the Federal Reserve Board allowed the Swiss National Bank to use dollars under its swap line agreement to provide special assistance to UBS, a large Swiss banking organization. Specifically, on October 16, 2008, the Swiss National Bank announced that it would use dollars obtained through its swap line with FRBNY [the Federal Reserve Bank of New York] to help fund an SPV [Special Purpose Vehicle] it would create to purchase up to $60 billion of illiquid assets from UBS. According to FRBNY data, from December 11, 2008, through June 2009, Swiss National Bank drew dollar amounts generally not exceeding about $13 billion to help fund this SPV that served a function similar to that of the Maiden Lane SPVs. Federal Reserve Board staff acknowledged that this was an atypical use of swap line dollars as the swap line agreements were initially designed to help foreign central banks provide dollar loans broadly to institutions facing dollar funding strains.”
Little wonder then that the takeover of Credit Suisse by UBS has failed to restore confidence and in fact seems to have increased investors nervousness about what may be about to happen in global finance.
As markets opened today, European bank shares plunged by more than 5 percent. Credit Suisse’s shares plunged over 63 percent while those of acquirer UBS fell nearly 13 percent. The wider European STOXX 600 dropped 1.6 percent before making a modest recovery.
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