Credit Suisse-Ubs, cold fusion rejected. That’s why it didn’t convince the markets

MILAN. Another start to the week in strong red for the European lists. Milan opened down by more than 1.5%, once again the worst price list on the Old Continent. Then he raised his head. The bank bailout of the giant Credit Suisse, taken over the weekend by rival UBS under the direction of the Swiss National Bank and with the support of the Confederation, was not enough to calm the mood. On the contrary: the UBS stock sinks and the alert remains very high. However, the major central banks are in the field, from the European ECB to the Bank of England to the American Fed. The institutions have started opening special credit lines designed for moments of stress in the banking system.

Why do stock markets go down?
Despite the emergency measures, the loss of confidence is already underway and the contagion is evident. After the collapse of the Californian Silicon Valley Bank (SVB), a week ago, the markets cannot find peace and the fear is of a new major global financial crisis. However, the announced domino effect has not yet materialised. The market fears systemic risk and reacts extremely sensitively to any new news from the banking world. The result is a rush to sell and bank stocks are especially targeted. Stocks move in a nosedive but bank bonds and those of peripheral countries also end up in the vortex. Today the Btp/Bund spread is again above 200 basis points (from 193 on Friday). Running down is all stock with a few exceptions.

Ubs stock falls after Credit Suisse bailout. Piazza Affari in deep red, the spread over 200

March 20, 2023

Are Europe and the USA in the same situation?
The tension is high. However, many elements indicate that the situation in Europe is not comparable to that of the United States. For example, shares of already struggling Credit Suisse plunged 31% on Wednesday. The collapse in prices was triggered by the announcement of the main shareholder, the Saudi National Bank, that it does not want to grant new funds to the Swiss bank anymore for regulatory reasons however. The news immediately dragged down several European stocks, including those of Intesa Sanpaolo of Unicredit, Deutsche Bank, the Dutch ING and the French BNP Paribas.

Then, on Thursday evening, the surprising turnaround: The Swiss National Bank took action alongside Credit Suisse with 50 billion francs. Furthermore, the main Saudi shareholder declared that “all is well” in the bank. The two pieces of news had a calming effect. Shares of the largest Swiss bank jumped nearly 33% on the day. Other banking stocks also turned positive on Thursday morning.

What are the risks?
However, the situation is extremely volatile, as evidenced by the recent problems of US regional bank First Republic. Again, investors feared contagion and triggered a 75 percent plunge in the stock. Not even the short-term hedges of $70 billion could calm investors at first. Analysts had downgraded the stock citing the risk of deposit outflows. The rating agencies Fitch and S&P have highlighted financing and liquidity risks. Only concerted action by eleven major US banks such as JP Morgan and Citigroup restored calm: they invested a total of $30 billion in the smallest financial institution.

What are the defenses of the institutions?
Experts in these hectic days keep repeating that worries about the liquidity of European financial institutions are exaggerated. European banks are subject to very strict rules regarding liquidity requirements. This is demonstrated by the so-called liquidity coverage ratio. The objective of this mechanism is precisely to ensure that banks can overcome crises without stumbling blocks. In any case, the goal of regulation in the aftermath of the 2008 global financial crisis was to ensure that banks were no longer bailed out by the state. Now Credit Suisse is again supported by the state and central authority network. At risk there is not the coverage of liquidity as much as the maintenance of investor confidence.