The Government of Switzerland has negotiated a deal to rescue Credit Suisse, the country’s second-largest bank.
Depositors and investors had been fleeing Credit Suisse following an outbreak of nerves about its financial stability.
It will now be bought by fellow Swiss bank and long-time rival UBS, which has received hundreds of billions of dollars of government assistance to sweeten the deal.
Here’s what you need to know.
Credit Suisse
Credit Suisse is an internationally-recognised bank which has operated for over 150 years. Its standing has fallen in recent years after a series of errors and scandals.
Speculation about its vulnerability has grown in recent months. Last week, its largest investor, the Saudi National Bank, was asked if it would consider giving financial help if required. The response was “absolutely not”.
This prompted depositors and investors in Credit Suisse to depart, tanking the share price and putting the bank at risk of failure.
Credit Suisee rescued
Over the weekend, the Swiss Government negotiated a deal for another Swiss bank, UBS, to buy Credit Suisse.
UBS will pay a heavily discounted price and will receive billions in support from the Swiss Government. The Government will require investors in Credit Suisse to bear at least some of the cost.
UBS says it plans to downsize Credit Suisse’s operations and run it in a more “conservative” manner.
The context
Credit Suisse’s troubles follow the collapse of a number of small- and medium-sized U.S. banks including the Silicon Valley Bank.
The failures do not appear to be directly related, but both are linked to a general climate of anxiety in the global financial system driven by high interest rates, which has prompted greater caution and scrutiny among investors.
Will there be more?
It’s unclear whether this general anxiety will lead to any further bank failures.
The risk of ‘contagious’ anxiety is one of the main reasons governments tend to support struggling banks, as the Swiss Government did with Credit Suisse and the U.S. Government did with Silicon Valley Bank.
The U.S. Federal Reserve (‘the Fed’, the U.S. central bank) has also taken steps to reassure the global financial system.
Yesterday, the Fed announced it would open up U.S. dollar ‘swap lines’ with several other central banks. Swap lines, previously used during the 2008 Global Financial Crisis, effectively allow the U.S. Government to provide financial support to struggling foreign banks.
