Introduction
All of us might remember the Financial Crisis of 2008 which begin with cheap credit and lax lending standards that fueled a housing bubble. When the bubble burst, the banks were left holding trillions of dollars of worthless investments in subprime mortgages. The Great Recession that followed cost many their jobs, their savings, and their homes.
It seems that current market scenario is also heading us towards that time horizon again. As we see 3 US banks has collapse (Silvergate, Signature and Silicon Valley bank) and the 4th one i.e. Credit Suisse is on the edge of collapse. Credit Suisse is one of the top investment bank providing financial, wealth management services across the globe. so what were the reasons that make the situation is worse for bank.
1. Financial situation:
If we look at banks last 3 year financial statement we will see a gradual decrease in banks revenue and incurring of losses year by year which ultimately put a doubt in the mind of stakeholders and they start dumping the shares.
2. Involvement in Scandals:
The bank has not only been witnessing loss after loss, but it has also been involved in several scandals. It has bee accused of supporting Drug dealers, mafia etc. Two major scams which deplete the bank’s reputation was Archegos Capital scam and the Greensill Capital scam. Because of these scams bank lost $5.5 billion and most important investors and stakeholders trust.
3. Discontinuance of Business Segments
After the scam bank close its Prime Finance Business which was cater to Hedge funds like Archegos, providing them services like trading, lending and so on and now they are earning majorly from investment banking and wealth management.
One of the important point is that Credit Suisse bank funds 60% of its assets by borrowing money from different lenders and in case if it could not repay the money it will bring a huge liquidity crisis in the system. Therefore it is said that bank failures are scary.
Therefor to avoid this failure Swiss Central Bank came forward and offered 50 Billion Swiss Francs ($53.68 billion) to credit Suisse for short term liquidity around 15 march 2023 and after some days UBS bank was ready to buy Credit Suisse at a valuation of $ 3.3 billion.
Conclusion :
Here we see that UBS Acquisition deal save the global economy from a big crisis but a question arise whether it will benefit in long run or it will benefit only in short run. Well if we look at the 2008 crisis then the root cause of bank failure was bad investing by banks whether today is also same situation? No, because today banks invest in government bonds then what is the problem. I think problem lies in confidence of depositors because as bond rates increase depositors or investors withdraw money. Banks are required to generate confidence by increasing capital adequacy ratio, increasing capital cushion so investors or depositors don’t loose their confidence in bank.
Disclaimer: These are my personals views and not constitute any recommendation.
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