UK Financial System ‘Safe and Sound,’ Central Bank Says After Credit Suisse Deal

A view of the Bank of England in London, on Feb. 2, 2023. Yui Mok/PA Media

Britain’s central bank has said the UK financial system remains “safe and sound” as it seeks to calm fears after the Swiss government mediated the merger between the country’s two largest banks to save Credit Suisse from collapse.

Swiss investment banking company UBS announced on Sunday evening it will purchase its rival Credit Suisse in a deal worth more than $3 billion.

Credit Suisse has a UK base in Canary Wharf and all its UK businesses remain open, with customers able to access their deposits.

A sign displays the name of Credit Suisse on the floor at the New York Stock Exchange in New York on March 15, 2023. Seth Wenig/AP Photo

The Bank of England said on Sunday evening: “We welcome the comprehensive set of actions set out by the Swiss authorities today in order to support financial stability.

“We have been engaging closely with international counterparts throughout the preparations for today’s announcements and will continue to support their implementation.

“The UK banking system is well capitalised and funded, and remains safe and sound.”

But in a sign of global unease, the UK central bank—along with the U.S. Federal Reserve, the European Central Bank, the Bank of Canada, the Bank of Japan, and the Swiss National Bank—took steps to enhance the provision of liquidity.

Seven-day maturity U.S. dollar swap lines between the Fed and the other central banks will be increased from a weekly to a daily basis.

“The network of swap lines among these central banks is a set of available standing facilities and serves as an important liquidity backstop to ease strains in global funding markets, thereby helping to mitigate the effects of such strains on the supply of credit to households and businesses,” the Bank of England said.

Britain's Chancellor of the Exchequer Jeremy Hunt walks out of Number 11 Downing Street on his way to make a full budget statement in the House of Commons, in London, on Nov. 17, 2022. Justin Tallis/AFP via Getty Images

Chancellor of the Exchequer Jeremy Hunt said: “The UK government welcomes the steps taken today by the Swiss authorities in relation to Credit Suisse to support financial stability.

“The Bank of England has confirmed the UK banking system remains safe, sound, and well capitalised.”

The UK’s Financial Conduct Authority said it is “minded to approve” the aspects of the UBS/Credit Suisse deal which fall under its remit in the UK.

Contagion

Credit Suisse has had problems for years but was pushed over the edge last week because of market jitters sparked by the failure of Silicon Valley Bank, a mid-sized lender in the United States.

The bank’s failure on March 10 sparked a crisis of confidence in the global banking industry.

Credit Suisse dropped a bombshell on March 14, announcing that it discovered “material weaknesses” in its financial reporting that would result in a material misstatement of its annual financial statements.

On Sunday evening, Swiss President Alain Berset said during a press conference, “The liquidity outflows and market volatility showed that it was no longer possible to restore the necessary confidence and that the swift and stabilizing solution was absolutely necessary.”

“The takeover of Credit Suisse by UBS is the best solution for restoring the confidence that has been lacking in financial markets recently and for best managing the risk to our country and its citizens,” he added.

But the rescue deal with UBS is not expected to calm markets much. Around $17 billion dollars worth of Credit Suisse bonds were wiped out as part of the deal.

On Monday morning, shares in Credit Suisse dropped by around 63 percent while UBS’s shares fell 16 percent.

The FTSE 100—London’s top index—fell by as much as 129 points shortly after the markets opened on Monday morning, led lower by the biggest banks in the country.

Standard Chartered saw its shares fall by more than 7 percent at one point, while Barclays was just under 6 percent down.

Since the collapse of Silicon Valley Bank, the FTSE 100 index has fallen by close to 9 percent.

‘Confident’

But some British banking experts have rejected comparisons to the 2008 global financial crisis.

Lord Turner of Ecchinswell, who was head of the UK financial regulator during the last crisis and helped to redesign global banking, told The Sunday Times that he is confident about financial stability.

“One, there’s much more capital in the banking system. Two, we’re not at the end of a sustained global credit-fuelled property boom. Three, we have considerably less opaque interconnectivity between the core banking system and the shadow banking system … To me, the balance is still that we’re unlikely to hit a systemic financial crisis.”

The U.S. Treasury has also expressed confidence in its own banking system.

Treasury Secretary Janet Yellen and U.S. Federal Reserve Chairman Jerome Powell issued a joint statement on March 19 welcoming the UBS/Credit Suisse deal.

“We welcome the announcements by the Swiss authorities today to support financial stability,” the statement reads. “The capital and liquidity positions of the U.S. banking system are strong, and the U.S. financial system is resilient. We have been in close contact with our international counterparts to support their implementation.”

Emel Akan and PA Media contributed to this report.