The controversial rescue deal for troubled lender Credit Suisse and the continuing fallout from the collapse of Silicon Valley Bank indicates the world is sliding into a crisis “far worse” than the GFC, one analyst has argued.
Following crunch talks aimed at stopping the stricken bank from triggering a wider international meltdown, Swiss bank UBS on Sunday agreed to take over its rival Credit Suisse for $US3.25 billion ($4.8 billion) – less than half its Friday closing valuation.
The deal, in which Switzerland’s biggest bank will take over the second-largest in the country, was vital to prevent irreparable economic turmoil spreading throughout the country and beyond, according to the Swiss government.
“This is as bad as it gets,” ACY Securities chief economist Clifford Bennett said in a note on Monday.
‘Best solution’
The Credit Suisse deal was welcomed in Washington, Frankfurt and London as one that would support financial stability, after a week of turbulence following the collapse of two US banks.
After a dramatic day of talks at the finance ministry in Swiss capital Bern – and with the clock ticking towards the markets reopening on Monday – the takeover was announced at a press conference.
Swiss President Alain Berset was flanked by UBS chairman Colm Kelleher and his Credit Suisse counterpart Axel Lehmann, along with the Swiss finance minister and the heads of the Swiss National Bank (SNB) central bank and the financial regulator FINMA.
The wealthy European nation is famed for its banking prominence and Mr Berset said the takeover was the “best solution for restoring the confidence that has been lacking in the financial markets recently”.
If Credit Suisse went into freefall, it would have had “incalculable consequences for the country and for international financial stability”, he said.
It comes amid warnings that nearly 200 banks in the US are as vulnerable to the same fate as Silicon Valley Bank (SVB). The study published on the Social Science Research Network identified 186 banks that could fail if half their depositors withdraw their funds quickly.
US authorities inadvertently triggered a squeeze on regional banks last week by announcing a de facto bailout of SVB depositors, waiving the $US250,000 ($370,000) insurance cap to fully protect all customers.
Ms Yellen was grilled by Oklahoma Republican Senator James Lankford during a Finance Committee hearing on Thursday, where she appeared to confirm the existence of a two-tier system under the Federal Deposit Insurance Corporation (FDIC).
“Will the deposits in every community bank in Oklahoma regardless of their size be fully insured now? Will they get the same treatment that SVB or Signature Bank just got?” Mr Lankford asked.
“A bank only gets that treatment if a [supermajority] of the FDIC board, a supermajority of the Fed board, and I in consultation with the President determine that the failure to protect uninsured depositors would create systemic risk and significant economic and financial consequences,” Ms Yellen replied.
Ms Yellen appeared unable to answer how the government planned to prevent large depositors from moving their funds out of community banks into the big banks.
“Look, I mean, that’s certainly not something that we’re encouraging,” she said.
Mr Lankford replied, “That is happening, right now … it’s happening because you’re fully insured no matter what the amount is if you’re in a big bank, you’re not fully insured if you’re in a community bank.”
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