Home/ Economy / Global banking crisis: Is the worst over?

Investors and strategists believe the turmoil in global financial markets still has room to run even after UBS Group's state-backed takeover of Credit Suisse, and the announcement of new dollar liquidity measures among central banks.

In a package engineered by Swiss regulators on Sunday, UBS Group AG will pay $3.23 billion for 167-year-old Credit Suisse Group AG and assume up to $5.4 billion in losses.

Investor focus has now shifted to the massive blow some Credit Suisse bondholders will take under the UBS acquisition, which has added to anxiety about other key risks including contagion and the fragile state of US regional banks.

“The Credit Suisse deal coupled with the swap line news have calmed nerves, for now. But I think First Republic and other regional banks remain unsettled and so I’m not sure we can sound the all clears just yet," said Win Thin, global head of currency strategy at Brown Brothers Harriman & Co.

“The current banking crisis isn’t likely to be as wrenching as the GFC. However, it could cause a recession if it triggers an economy-wide credit crunch. Whether it will is the question we’re grappling with currently," Ed Yardeni, president of Yardeni Research, wrote in a research note.

What just happened?

The banking sector lurched into crisis earlier this month with failure of US lenders Silicon Valley Bank and Signature Bank before ensnaring its biggest name yet in Credit Suisse.

Problems remain in the US banking sector, where shares are still under pressure despite a move by several large banks to deposit $30 billion into First Republic Bank, another institution rocked by the failures of Silicon Valley and Signature Bank.

Bank shares plummet

Banking stocks and bonds continue to plunge today as the hit to investors from UBS Group's takeover of Credit Suisse fanned concerns about the health of the global banking sector.

UBS shares fell by as much as 16% in early trade, their biggest one-day fall since 2008, amid concerns among investors about the long-term benefits of the deal and the outlook for banks in Switzerland, a country once seen a paragon of sound banking.

European bank shares slumped, with an index of leading lenders down 5.8%. German banking giants Deutsche Bank and Commerzbank dropped 10.9% and 8.5% respectively, while France's BNP Paribas fell 8.2%.

Those sharp moves followed a day of heavy selling in Asian financial markets as early investor optimism about official efforts to stem a banking crisis quickly evaporated.

How worried should you be?

US President Joe Biden has pledged to do "whatever it takes" to ensure the safety of the banking system and assured people their money is secure, while officials in Europe, Japan, Australia and elsewhere have likewise sought to ease concern.

Berkshire Hathaway's Warren Buffett has held discussions with senior Biden administration officials about the banking crisis.

Also, US and European banking executives and regulators have taken measures to shore up the industry to restore confidence. The Biden administration has moved to backstop consumer deposits while the Swiss central bank loaned billions to Credit Suisse to stabilise its shaky balance sheet.

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Updated: 20 Mar 2023, 05:38 PM IST
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