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  • 24 March 2023
  • London

Volatility in bank share prices seems to have eased a little this week, following the announcement over the weekend that UBS, Switzerland’s second-largest bank, had agreed to acquire the troubled Credit Suisse.

The acquisition, together with the central banks’ assurance that they were willing to provide liquidity to support the financial markets, has brought much-needed relief to nervous investors.

However, Thomas Murray’s Risk Committee has decided to place On Watch Outlooks for some of the banks it covers as a precautionary measure because some continue to be under scrutiny, especially UBS.

The Credit Suisse takeover is aimed at protecting the Swiss economy and ensure financial stability following the large losses reported by Credit Suisse and the bank's appeal to the central bank for support. The merged entity will have access to an additional liquidity assistance loan in bankruptcy of up to CUS$108bn, with privileged creditor status as part of the Federal Council's Emergency Ordinance. It will also have a liquidity assistance loan of up to US$108bn backed by a federal default guarantee.

Both banks also continue to have access to the SNB's standard liquidity facilities.

In light of this, on 20 March 2023 Thomas Murray’s Risk Committee reviewed the Sub-Custodian Assessment of UBS and decided to change the Overall Risk Outlook, Financial Risk Outlook, and the Operational Risk Outlook to On Watch.

Two additional bank rating outlooks have been put On Watch, as they seem to remain vulnerable to market sentiment. Société Générale increased its bad loans provisions five-fold in the last quarter, which suggests that there is a high expectation of defaults on loans.

Similarly, Deutsche Bank’s share price has fallen considerably and, combined with well-documented weaknesses in its risk framework over the last few years, this has caused concern about its governance. As a result, Thomas Murray’s Risk Committee has decided to put both the Overall Outlook and the Financial Risk Outlook for both banks 'On Watch'.

It remains to be seen what impact the announcement from the Federal Reserve on Wednesday 22 March will have, following the increase in its key rate by 0.25 percentage points, stating the banking system was "sound and resilient". Will it bring volatility back to a still-fragile banking system?