What is behind the banking crisis, and how it can affect the markets

Bank Crisis

For Martin Lück, chief strategist of the world’s largest asset manager, Blackrock, the purchase of the Swiss bank Credit Suisse by UBS can be depicted “as if a zombie had left, but a monster was emerging”, in reference to the “new UBS.” “The risk is cushioned, for the moment, because the weak bank is out of the market and receives massive support from a stronger bank, which is about twice as big,” Lück told the Neue Zürcher Zeitung, early this week.

This new UBS is heavily secured by additional collateral, but “this also creates a huge bank, which is too big to fail” as the new bank, with total assets of nearly €1.58 trillion, will be twice the size of the gross domestic product of Switzerland. UBS already operates around the world, both in wealth management and investment banking. This is one of the reasons why the main central banks agreed last weekend to expand the possibilities for commercial banks to borrow short-term dollars. It is about avoiding a shortage of liquidity in the global financial system.

Severe cuts

With the merger, the current management of UBS faces a Herculean task. The board of directors is led by the experienced banker Colm Kelleher, who worked for the US investment bank Morgan Stanley for 30 years. On the other hand, since 2020 the operational management is in the hands of the Dutchman Ralph Hamers, previously in charge of the large ING bank. He is the one who now has to fix the mess, because up to a fifth of Credit Suisse’s 50,000 employees could lose their jobs due to the bank’s disappearance. “There are huge overlaps in business models,” says Blackrock’s Martin Lück, referring to its asset management and investment banking divisions. “It will take significant cuts to make this bank profitable.”

Hamers worked for the Dutch financial group ING for almost 30 years, until his appointment as head of UBS in September 2020. Following the financial crisis, he restructured the bank, which he had run since 2013, and also transformed it into a modern and digital bank. innovative. However, his reputation has been damaged by a money laundering scandal, which the bank settled five years ago with a payment of 775 million euros, but which is still under investigation.

Another affected by the demise of Credit Suisse is the Swiss banking supervisory authority Finma, which has an even bigger task ahead of it. His lack of oversight of Credit Suisse, whose difficulties have been known for months, has already been criticized. Should the supervisory authority have observed and, above all, acted earlier? This is just one of the questions being heard in the markets these days.  

What will the US Federal Reserve do?

In the coming days and weeks, it will also be interesting to see which banks benefit from the recent merger. Because Credit Suisse and UBS are actually bitter rivals. Many clients chose one of these banks by rejecting the other. Others, on the other hand, maintained commercial relations with both institutions because they wanted to diversify. These clients could now move their accounts to other smaller banks, or to asset management companies in Switzerland, or the rest of Europe.

It also remains to be seen how the US Federal Reserve will react in the short term. This is something that stock traders are waiting for impatiently given the turbulence experienced since Wednesday (03.15.2023) in the financial markets. Will this organization maintain its restrictive policy to fight against inflation? Commerzbank currency expert Antje Praefcke says: “Expectations ahead of a Federal Reserve rate meeting have never diverged so much, from 0 to 25 to 50 basis points, to my recollection.” This is understandable, after all, the problems in the banking sector originated in the US.