Switzerland, a rustic heavily depending on financing its economy, is on the right track to merge two of its largest and best-known banks into one financial giant.
Fabrice Coffrini | AFP | Getty Images
The collapse of banking giant Credit Suisse has sent shockwaves through financial markets and appears to have dealt a blow to Switzerland’s reputation for stability, with one executive suggesting investors will now view the mountainous Central European country as a “financial banana republic”.
UBS, Switzerland’s biggest bank, agreed on Sunday to purchase its struggling domestic rival Credit Suisse for 3 billion Swiss francs ($3.2 billion) in a government-backed discount price.
Swiss authorities and regulators helped negotiate the deal, which got here amid fears of contaminating the worldwide banking system after the collapse of two smaller US banks in recent weeks.
The rescue deal means Switzerland, a rustic heavily reliant on finance for its economy, is on the right track to merge two of its biggest and best-known banks into one financial giant.
“Switzerland’s position as a financial hub is in a shambles,” Octavio Marenzi, CEO of Opimas, said in a research note. “The country will now be seen as a financial banana republic.”
“The failure of Credit Suisse could have serious consequences for other Swiss financial institutions. A nationwide reputation with prudent financial management, solid regulatory oversight and, frankly, a somewhat bleak and dull approach to investment has been damaged,” Marenzi said.
A spokesperson for Swiss regulator FINMA was not immediately available for comment.
Shares in Swiss-listed UBS rose 7.3% around 12:50 p.m. London time (8:50 a.m. EST) on Tuesday, continuing their gains after close of the previous session.
Credit Suisse was up 3.5% in afternoon trading after Monday’s trading session, up 55%.
Liquidation of Credit Suisse bonds
Under the terms of the emergency takeover, investors in Credit Suisse’s additional Tier 1 bonds – widely thought to be relatively dangerous investments – will see the worth of their holdings drop to zero. Which means that investments value around 16 billion francs will turn out to be worthless.
AT1 bonds, also often known as contingent convertibles or “CoCos” are a kind of debt that is taken into account a part of a bank’s regulatory capital. Holders can convert them into shares or redeem them in certain situations – for instance, when the bank’s capital ratio falls below a predetermined threshold.
“Extraordinary government support will lead to a full write-down of the nominal value of all AT1 Credit Suisse debt of roughly CHF 16 billion, thus increasing the share capital” – FINMA he said Sunday.
The unorthodox move goes against the everyday practice of favoring bondholders over shareholders within the event of a bank failure and creating turmoil within the convertible bank bond market on Monday.
Vítor Constâncio, who served as vice chairman of the European Central Bank from 2010 to 2018, said on Twitter that FINMA’s announcement was “a mistake with consequences and potentially multiple lawsuits.”
The ECB and the British Bank of England tried to distance themselves from FINMA’s decision.
European Union regulatory authorities, consisting of the ECB, the European Banking Authority and the Single Resolution Board, he said Monday that they’d proceed to charge shareholders losses before bondholders.
“This approach has been consistently applied in previous cases and can proceed to guide the actions of the SRB and ECB banking supervision in crisis interventions,” they wrote.
The Bank of England echoed this sentiment soon after. “Holders of such instruments should expect to be exposed to resolution or insolvency losses within the order of their position on this hierarchy”, BOE he said.
What concerning the Swiss franc as a shelter?
“Considered one of the things about all this banking pressure we have seen over the past week or two is that indeed yes, we have seen a whole lot of volatility in equity markets, a whole lot of volatility in fixed income markets and likewise commodities but little or no volatility in currency markets,” Bob Parker, senior advisor at the International Capital Markets Association, told CNBC.Squawk Box Europe” on Tuesday.
Asked how investors might now feel about Switzerland’s reputation for stability, Parker replied: “Once I was in Zurich last week, this topic was actually a hot topic.”
He said there was a “very modest” weakness in the military Swiss franc against euro in recent days, noting that that is the currency pair that the Swiss National Bank, the country’s central bank, is specializing in.
The euro was last traded at CHF 0.9961, down from 0.9810 on March 14.
“Now we have come near parity between the Swiss franc and the euro. So I feel to reply your query, yes, to some extent the Swiss franc as a safe-haven currency has lost a few of its charm. There isn’t any doubt about it,” Parker said.
“Will or not it’s recovered? Probably yes, I might argue that it’s a really short-term effect,” he added.
— Elliot Smith and Sophie Kiderlin of CNBC contributed to this report.