Thousands of jobs are set to be lost in the City as regulators race to rescue one of the world’s biggest banks before markets open on Monday morning.
The government of Switzerland held an extraordinary meeting on Saturday evening to seal a shotgun takeover of troubled Credit Suisse by its Swiss rival UBS amid rising fears of a new international financial crisis.
Any deal is expected to result in thousands of job losses in London, where the two banks employ around 10,000 people between them at large offices in the City and Canary Wharf.
The Bank of England and other international regulators have been holding discussions with the Swiss national bank and regulator Finma about the terms of the rescue, which needs to be finalised within hours to avoid the risk of a market panic on Monday. A key sticking point was said to be the future of Credit Suisse’s troubled investment bank, which has a significant presence in London.
The Swiss government was preparing to use emergency powers to speed up the takeover, allowing it to skip a consultation period under which UBS would normally have to give shareholders six weeks to consult on the deal.
If a deal is agreed, it will be the third intervention in a bank within days after a crisis that has roiled both sides of the Atlantic.
The turmoil, which has its roots in rising interest rates, began with the sudden collapse of US lender Silicon Valley Bank, prompting an intervention by the federal government to protect depositors. Regulators also closed New York-based Signature Bank.
Meanwhile, major US lenders injected $30bn (£25bn) into Californian bank First Republic on Thursday. This was not enough to stop another 33pc drop in its stock the following day.
The boards of Credit Suisse and UBS are now locked in meetings as they attempt to finalise plans for the deal, with UBS demanding an indemnity against future legal costs and breathing space from regulators to shore up its financial position if an agreement is reached.
The Swiss authorities are widely believed to regard a UBS takeover as the least bad option for restoring confidence in Credit Suisse. Customers withdrew almost £9bn of deposits a day last week as concern mounted, according to the Financial Times.
Douglas McWilliams, deputy chairman of the Centre for Economics and Business Research, said it was an “immediate” banking crisis that needed a swift resolution.
He said: “There are knock-on effects because all banks have deposits with all the banks.
“We’ve already got a degree of illiquidity in the system as a result of the banking problems of the last 10 days.”
Although British customers are protected by well-capitalised banks and the UK has so far largely avoided the turmoil on the Continent, Mr McWilliams said that continued disruption could make it harder for customers to get a mortgage.
He added: “Banks everywhere will be shoring up their capital and money that they thought was free to be lent may not be.”
Banks are now expected to be more reluctant to lend money over the coming year and interest rates will no longer rise as sharply, according to the CEBR.
Mr Williams said the Bank of England is very unlikely to raise rates by more than 25 percentage points this week and may not even do that. In the US, the CEBR expects interest rates not to be raised again.
Mr Williams said: “We will see that the fight against inflation will have been called off before inflation has been fully beaten. You can’t fight a war on two fronts at once and dealing with the banking crisis is much more important than squeezing out the remnants of inflation.”
The rescue efforts follow a disastrous week in which shares in Credit Suisse slumped by nearly a fifth and speculation mounted over its future.
It is feared that failure to reach a deal before Monday morning will cause a further plunge in shares at the bank, which has a balance sheet of more than £470bn, with severe repercussions in markets around the world.
A previous attempt to restore market confidence by injecting $54bn (£44bn) into Credit Suisse with an emergency loan from the Swiss central bank failed to calm nerves on Wednesday, with shares falling lower in the following days.
A takeover by UBS would create one of the biggest banks in the world, with a balance sheet of £1.3 trillion, more than twice the size of the Swiss economy – raising questions over whether it would be too big to rescue if the turmoil does not abate.
Parts of the bank would likely be auctioned off by UBS in future weeks, with rival Deutsche Bank expressing an interest in some of its business.
The US investment business BlackRock also considered a bid for Credit Suisse before ruling out making an offer, according to the Financial Times.
Guy Ellison, an analyst at wealth manager Investec, said the banking sector would continue to be weak if a deal was not agreed before Monday.
He said it would be unlikely that another bank would want to challenge UBS to acquire Credit Suisse given the scale of its cash flow problems, but this could change.
Mr Ellison said: “I don’t think that UBS will want to retain all of the individual operating parts of Credit Suisse and at that stage, once the ship has been stabilised, then you would expect to see other industry players interested in taking parts of the former Credit Suisse business.”
Source: finance.yahoo.com