How did Credit Suisse collapse?

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Overview of the topics

  • Stocks Highlights: The Swiss authorities and UBS are attempting to finalize the acquisition of Credit Suisse within a month.
  • Financial Data: Shares of Credit Suisse surged up to 33% after the Swiss National Bank announced a loan of up to $54 billion.
  • Social Data: The recent collapse of Credit Suisse and other banks has caused investor sentiment to reach the level of 20 years ago.
  • Onchain Data: At the beginning of the week, Bitcoin's value surged by as much as 4% due to fears of a banking crisis.
  • Deep Dive: Deutsche Bank's shares have fallen by almost 15% to their lowest in five months.

Stocks Highlights

UBS rushes Credit Suisse acquisition

The Swiss authorities and UBS are attempting to finalize the acquisition of Credit Suisse within a month in order to safeguard the bank's clients and employees.

However, obtaining regulatory approval from multiple countries could take several months, leading to a longer timeline for the actual merger of Credit Suisse with UBS. Thomas Jordan, the chairman of the Swiss National Bank, stated that UBS has fully committed to the takeover and emphasized the importance of ensuring its success. He added that the next two weeks will be crucial.

Image source: Credit Suisse

The longer the deal takes to close, the more difficult it is for Credit Suisse to maintain its business, because uncertainty erodes confidence in the bank. In fact, Bank of America's electronic stocks desk, which uses computer-led strategies, has stopped trading with Credit Suisse. Furthermore, Wall Street banks as well as European firms are lifting hiring freezes to attract staff from Credit Suisse.

Financial Data

What happened before the deal?

Shares of Credit Suisse surged up to 33% after the Swiss National Bank announced a loan of up to $54 billion to help the bank avoid a potential collapse, settling on around a 17% gain.

Graph source: Google

This sudden stock surge was a stark difference from the bank’s seven-day losing streak when shares were halted Wednesday because they fell to as much as 21%. The chaos broke out following Credit Suisse’s announcement of material weakness in its 2021 and 2022 financial reporting process, which includes a lack of effective risk assessment to identify misstatements in its financial reporting. Credit Suisse’s biggest backer, the Saudi National Bank, then announced it wouldn’t buy more shares in the Swiss bank.

Image source: Credit Suisse

However, Credit Suisse holds the status of a global systemically important bank, which means that if it were to collapse, it could cause a financial crisis that would impact the global economy. It’s enough to think that the collapse of smaller lenders like Signature Bank and SVB already spread panic among investors, particularly since the latter was a popular choice among clients in the tech industry. Indeed, SVB's closure was the biggest bank failure in the US since the Great Recession, with it having sold $21 billion in securities at a loss of $1.8 billion and seeking to raise $2.25 billion in terms of capital.

Graph source: Bloomberg

The collapse of those banks caused venture capital firms, like Peter Thiel's Founder's Fund, to advise their portfolio firms to withdraw their funds from SVB. Signature Bank's failure just two days later was attributed by experts to an SVB-generated panic. The effect of these collapses was felt by other banks as well, like First Republic Bank, whose shares fell by as much as 52%. In response to the situation, the Federal Reserve introduced an emergency lending program to help banks meet the needs of their depositors and to avoid the need to quickly sell assets during times of stress.

Graph source: Datastream

It’s not the first time in which Credit Suisse faces problems. In fact, in recent years it has created multiple scandals, including mismanagement of funds, a conviction for failing to prevent money laundering, and also a $500 million court ruling for damages.

Social Data

The history behind Credit Suisse

Credit Suisse Group, which is also known as Swiss Credit, is a worldwide investment bank and financial services firm that was founded and has its headquartered in Switzerland.

Credit Suisse offers a wide range of financial services, including investment banking, private banking, asset management, and shared services, and has a presence in all major financial centers around the world. The institute is renowned for its strict bank-client confidentiality and banking secrecy, and it has been classified as a global systemically important bank by the Financial Stability Board. It also acts as a primary dealer and Forex counterparty of the Federal Reserve in the United States.

Graph source: Financial Stability Board

But what is its history? Credit Suisse was established in 1856 with the aim of funding the development of Switzerland's rail system. It played a crucial role in establishing Switzerland's electrical grid and the European rail systemby issuing loans. In the 1900s, the institute shifted its focus to retail banking in response to the increase of the middle class and competition from other Swiss banks like UBS and Julius Bär. In 1978, Credit Suisse partnered with First Boston before acquiring a controlling stake in the bank in 1988. In the following decade, it acquired many institutions, including Winterthur Group, Swiss Volksbank, Swiss American Securities Inc., and Bank Leu. The Saudi National Bank, Qatar Investment Authority, and BlackRock are among the bank's largest institutional shareholders.

Graph source: Credit Suisse

What happened then? Although Credit Suisse was relatively unaffected by the 2008 crisis, it scaled back its investment business, implemented layoffs, and cut costs. However, as already said, the bank was the subject of several international investigations into tax avoidance, which led to a guilty plea and the forfeiture of US$2.6 billion in fines between 2008 and 2012. By the end of 2022, Credit Suisse's assets under management were approximately CHF 1.3 trillion.

Graph source: Investoom

However, after UBS revealed that it intends to purchase Credit Suisse Group for $3.25 billion on the 19th of March, the attitude towards the bank started to worsen. The collapse of Credit Suisse and the other banks led investor sentiment close to levels of pessimism seen at the lowest points over the past 20 years, with systemic credit events being the top-tail risk. This negativity was reflected in investors’ tweets too, as during the past week Credit Suisse was typed 250 times per day.

Graph source: Investoom

Onchain Data

After Credit Suisse BTC value surged

At the beginning of the week, Bitcoin's value surged by as much as 4% due to fears of a banking crisis that started with the downfall of SVB earlier this month, leading to the takeover of Credit Suisse by UBS.

The price of Bitcoin hit its highest level in nine months, nearing the $30,000 mark, which is expected to be a key resistance level. However, Bitcoin later lost its gains and turned negative. Many investors are seeing Bitcoin as an alternative investment amid the run on banks and action by governments and central banks to instill confidence in global finance.

Graph source: Coinbase

Since the FDIC takeover of Silicon Valley Bank on March 10, BTC has surged 42% and is up 63% from its mid-November low of $15,500. The correlation between Bitcoin and gold has strengthened, and some investors may be turning to it due to the ongoing banking crisis. However, some analysts are waiting for more signs of support above the $25,000 level before turning more bullish on Bitcoin.

Graph source: Bank of America


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Deep Dive

Deutsche Bank shares plunge

Deutsche Bank's shares have fallen by almost 15% to their lowest in five months after concerns were raised among investors about the stability of Europe's banks.

The cost of insuring the bank's debt against the risk of default has shot up to more than four-year highs. However, market watchers note that European regulators and central banks have reiterated their intention to keep markets stable and that the banks are more strongly capitalized and regulated than they were before the global financial crisis in 2007. Invite 3 friends to read the full article

News of the week

  • Banks: Confidence in European banks slides again as profit outlook dims. [Read more]
  • Technology: Lula to seek Chinese semiconductor technology, investment in Beijing. [Read more]
  • Markets: Deutsche Bank is a victim of an irrational market. [Read more]
  • Investments: Warren Buffett's investments in financial firms. [Read more]

Read the full version here.


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