UBS to buy Credit Suisse bank for €3 billion

In a move arranged by authorities to avert further market-shaking instability in the global banking system, banking giant UBS is purchasing troubled rival Credit Suisse for 3 billion.

Monday saw a decline in the value of the banking sector as initial relief at the unprecedented state-backed rescue of the struggling lender gave way to fresh concerns over the dangers of the high-yield debt that major banks are issuing.

After a plan for Credit Suisse to borrow up to 50 billion francs (€50 billion) failed to satisfy investors and the bank's customers, the Swiss government urged UBS to acquire its smaller rival. Following the bankruptcy of two U.S. banks, which sparked concerns about other potentially unstable global financial institutions, shares of Credit Suisse and other banks fell precipitously.

Authorities are concerned about the repercussions if Credit Suisse fails because it is one of 30 financial institutions considered to be globally systemically important banks.

For the stability of global finance, the transaction was "one of great breadth, "Alain Berset, the president of Switzerland, made the announcement on Sunday night. "An uncontrolled collapse of Credit Suisse would lead to incalculable consequences for the country and the international financial system."

The emergency ordinance permitting the merger to proceed without shareholder approval was passed by Switzerland's executive branch, a seven-member governing body that includes Berset.

Despite authorities' best efforts to calm the markets, they remain restless. Asian stocks declined on Monday, with Tokyo's Nikkei 225 losing 1.2% and Hong Kong's Hang Seng index down 2.7%. Bank shares in the area fell, while futures in Frankfurt and London also declined.

Axel Lehmann, chairman of Credit Suisse, referred to the sale to UBS as "a clear turning point."

Lehmann stated, "It is a historic, sad and very challenging day for Credit Suisse, for Switzerland and for the global financial markets." The focus is now on the future and on Credit Suisse's 50,000 staff members, 17,000 of whom work in Switzerland, he continued.

After news of the Swiss deal, the world's central banks announced coordinated efforts to stabilise banks, including access to a lending facility for banks to borrow U.S. dollars if they need them, a tactic commonly employed during the 2008 crisis. Such swap lines have been used to borrow $580 billion three months after Lehman Brothers failed in September 2008. Swap lines were also launched during the early Covid-19 pandemic market turbulence.

"Today is one of the most significant days in European banking since 2008, with far-reaching repercussions for the industry,"Max Georgiou, a Third Bridge analyst, said. "These events could alter the course of not only European banking but also the wealth management industry more generally."

Colm Kelleher, the chairman of UBS, praised the acquisition's "enormous opportunities" and emphasized his bank's "conservative risk culture" in a subtle swipe at Credit Suisse's reputation for taking more daring risks in search of greater returns. He claimed that the combined organization would produce a wealth manager with invested assets totaling more than $5 trillion.

According to UBS officials, the bank will either shrink or sell off portions of Credit Suisse.

Karin Keller-Sutter, the Swiss Finance Minister, claimed the council "regrets that the bank, which was once a model institution in Switzerland and part of our strong location, was able to get into this situation at all."

The merger of the two largest and most well-known Swiss banks, each of which has an illustrious history dating to the middle of the 19th century, is a thunderclap for Switzerland's status as a major international financial hub and puts the country on the verge of having a single national banking champion.

The deal comes in the wake of the failure of two big American banks last week, which prompted a broad, frenzied response from the American government to head off more panic.

Christine Lagarde, president of the European Central Bank, praised Switzerland's officials for their "swift action," calling it "instrumental for restoring orderly market conditions and ensuring financial stability."

She emphasized once more how resilient the European banking industry is, with substantial financial reserves and plenty of available capital. Due in part to more stringent government supervision, the banks "are in a completely different position from 2008” during the financial crisis, partly because of stricter government regulation," she claimed.

The takeover will be supported with more than 100 billion Swiss francs from the Swiss government.

Credit Suisse bonds worth roughly 16 billion Swiss francs (€16 billion) will be eliminated as part of the agreement. A unique kind of bond is used by European bank authorities to give banks a capital cushion during hard times. The government-brokered deal caused a bank's capital to drop below the threshold that will cause the bonds to be cancelled.

According to Berset, the Federal Council conducted emergency sessions last week and has been examining Credit Suisse's problems since early this year.

Analysts in the banking sector and investors were still analyzing the deal, but at least one of them expressed concern that it would damage Switzerland's reputation as a leading international banking hub.

In an email, CEO of consultancy company Opimas LLC Octavio Marenzi said, "A country-wide reputation with prudent financial management, sound regulatory oversight, and, frankly, for being somewhat dour and boring regarding investments, has been wiped away."

Since Credit Suisse was listed as one of the world's important banks by the Financial Stability Board, an organization that oversees the global financial system, regulators were concerned that a collapse at Credit Suisse could have a similar impact on the financial system as the collapse of Lehman Brothers 15 years ago.

Although the parent bank of Credit Suisse is not subject to European Union oversight, certain of its subsidiaries in various European nations are.

Once Credit Suisse claimed that managers had found "material weaknesses" in its internal controls over financial reporting, the company's problems reappeared. Fears that it would be the next domino to fall were stoked by that. Several of its issues are distinct from and dissimilar from the flaws that caused Silicon Valley Bank and Signature Bank to fail. Due to their failings, the Federal Reserve and the Federal Deposit Insurance Corp. made massive rescue operations in an effort to avert a crisis comparable to the one that occurred in 2008.

The Saudi National Bank, Credit Suisse's largest shareholder, announced Wednesday that it will stop investing in the bank in order to avoid violating regulations that would take effect if its holding increased by nearly 10%. As a result, the firm's shares fell to a record low.

On the Swiss exchange, its shares fell 8% on Friday to settle at 1.86 francs ($2). The stock has experienced a protracted decline: In 2007, it was trading at more than 80 francs.

Despite UBS's size advantage, Credit Suisse continues to hold significant influence thanks to its $1.4 trillion in managed assets. It is a significant mergers and acquisitions advisor, has sizeable trading desks all around the world, and offers wealth management services to the rich. In contrast to UBS, the bank survived the 2008 financial crisis unaided.

In order to address a number of issues, including failed bets on hedge funds, frequent changes to its top management, and a spying scandal involving UBS, Credit Suisse is looking to raise money from investors and implement a new strategy.

By fLEXI tEAM