Why the purchase of Credit Suisse will not end the banking crisis

Credit Suisse will get its main competitor, UBS. This is not yet the end of the banking crisis, but already a sobering lesson for investors. On Sunday the fate of the second largest Swiss bank with a 150-year history was decided. After intense negotiations, the Central Bank of Switzerland announced that Credit Suisse, which had lost the trust of customers and investors, would be absorbed into UBS for 3 billion Swiss francs ($3.25 billion) in shares. That's more than half what the bank was worth at closing on Friday. UBS will receive preferential liquidity from the regulator for 100 billion francs and guarantees to cover losses for another 9 billion. Thus, the risk of Credit Suisse's collapse being passed on to other banks in Europe was flooded with money. It was quite real: the WSJ found out that clients withdrew $10 billion a day from the Swiss bank last week (for the entire fourth quarter - "only" 110 billion francs). UBS wins from the transaction, writes Bloomberg. Firstly, the amount of assets under its management will now approach $5 trillion, and secondly, it will receive a steadily profitable "home" business of Credit Suisse. The latter is valued at about three times the price that UBS will pay for the entire group. The main losers are Credit Suisse's big investors: convertible bonds worth 16.3 billion francs ($17.6 billion) will be written down to zero. They are issued by banks to replenish Tier-1 capital, and the holders are the latest in the list of creditors and shareholders, for which they get a higher interest rate. Notably, the Asian markets reacted to the news by falling in similar bonds. Saudi National Bank, which had become the largest investor in Credit Suisse four months before the collapse, announced the loss of 1.1 billion francs of the 1.4 billion invested. However, it was the sloppy statement of its head that triggered the collapse of quotes last Wednesday. In a broad sense, the losers are the Swiss banking system and its regulators, forced to rescue the second systemic player in 15 years: in 2008 the UBS itself was pulled out of the crisis model of "bad bank. The current merger carries high risks of management, rising costs and falling revenues, according to Citigroup. "The combined assets of [UBS and Credit Suisse are $1.7 trillion, or >200% of Swiss GDP <...> we doubt that [the deal] is what the Swiss government wanted," the analysts wrote. Is that the end of the banking crisis? Unfortunately, no: there is still a lot to fall, experts interviewed by Bloomberg say. A lot will depend on the Fed's rate decision this Wednesday. In any case, the former alternative (increase by 0,25 or 0,5 p. p.) is not actual any more. The regulator will have to choose between banking system stability (with the rate kept) and fighting inflation (with the rate hike). Last Thursday the ECB raised the rate by 0,5 p.p., fearing that a smaller step will provoke investor panic. Some analysts think the Fed can't afford to pause for the same reason, but raising the rate along with inflation will also bring down the economy - if it triggers a recession and credit crunch. These are all deferred consequences of ultra-soft "coronavirus" central bank policies, which are not exhausted by inflation, but could lead to a "disinflationary sharp landing." For details about why three big banks collapsed in the U.S., why their problems have the same root, and what the consequences for the global banking system will be, we told The Bell (this is a paid product, but it is worth it). On the whole, the current banking crisis looks a lot easier than the global financial one, primarily because it is a liquidity crisis, not a credit crisis, which is relatively easy to fill with money. On the other hand, the picture of volatility and record use of emergency financing by U.S. banks through the discount window is alarming: judging by it, the liquidity problems are very serious. The collapsed Lehman and Bear Stearns also seemed too small to cause a global financial crisis, Absolute Strategy analysts remind us. Investors should learn a few lessons. First, a name, even a name like Credit Suisse, does not guarantee anything. Although the bank's slow decline has dropped its capitalization dozens of times since its 2007 high, and it could make money on rebounds, the passive strategy ends up being a loser. Second, portfolios should be assembled as if external shocks could materialize at any moment. Finally, you need to get used to high volatility, especially if there are new victims of rising rates.