Government Backstop Reassuring; Long-Term Positive Event

Market Insight by Belal Mohammed Khan
Published on 21st March 2023

Regarding recent events in the Swiss banking sector, the support structures put in place are constructive and should prevent a crisis of confidence and rescue the Swiss banking system.

The developments over the past few days prove that officials at each level (bank, regulator, government, and central bank) have been caught “asleep at the wheel.” A bank failure of this size and importance to materialize is embarrassing from all perspectives and puts Switzerland in a poor light. However, looking forward, the regulatory framework in Switzerland will likely have to be further improved. Possible new regulation, coupled with the government backstop on this deal, is reassuring and a long-term positive.

The current broad market stress will be short-lived. While some investors may be frightened away, others may find assurances in actions taken by Swiss officials and foreign central banks. Moreover, long-term investors, especially pension funds and, more specifically, domestic Swiss pension funds, will find long-term value in the recent repricing.

Regarding the transaction, UBS all-share transaction will give Credit Suisse shareholders 1 UBS share for every 22.48 Credit Suisse shares held, equivalent to CHF 0.76/share for a total consideration of CHF 3 billion.
As UBS has stepped into this deal at the prodding of the Swiss authorities, UBS will have a formidable support structure and likely significant leverage in political and economic developments and direction.

In addition to the Swiss support structures, major central banks announced yesterday the expansion of US dollar swap facilities. The six developed market central banks include The Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve, and the Swiss National Bank. This will undoubtedly help ease market stress and some of the tightening of financial conditions.

The financial infrastructure is of vital importance. Its well-functioning is in the interest of national economic security. Authorities will do whatever it takes to ensure irrational fear does not dominate markets. Thus, they will do what is needed to construct safety nets, stop the damage, and restore confidence.

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