UBS buys Credit Suisse to stop the banking crisis

London
CNN
—

Switzerland’s biggest bank, UBS, has agreed to buy its ailing rival Credit Suisse in an emergency rescue deal aimed at stemming the panic in financial markets triggered by the failure of two US banks earlier this month.

“UBS today announced the takeover of Credit Suisse,”[ads1]; the Swiss National Bank said in a statement. It said the bailout would “ensure financial stability and protect the Swiss economy.”

UBS is paying 3 billion Swiss francs ($3.25 billion) for Credit Suisse, about 60% less than the bank was worth when markets closed Friday. Credit Suisse shareholders will be largely wiped out, receiving the equivalent of just 0.76 Swiss francs in UBS shares for shares that were worth 1.86 Swiss francs on Friday.

Extraordinary, the deal will not need shareholder approval after the Swiss government agreed to change the law to remove any uncertainty surrounding the deal.

Credit Suisse (CS) had lost the trust of investors and clients for years. In 2022, it recorded its worst loss since the global financial crisis. But the trust collapsed last week after it acknowledged “material weakness” in its books, and as the decline of Silicon Valley Bank and Signature Bank spread fears of weaker institutions at a time when rising interest rates have undermined the value of some financial assets.

Shares in the 167-year-old bank fell 25% during the week, money pouring in from investment funds it manages and at one point account holders withdrawing deposits of more than $10 billion per day, the Financial Times reported. An emergency loan of nearly $54 billion from the Swiss National Bank failed to stop the bleeding.

But it “built a bridge” for the weekend, to allow the rescue to be put together, Swiss officials said on Sunday evening.

“This acquisition is attractive to UBS shareholders, but let’s be clear, as far as Credit Suisse is concerned, this is an emergency rescue,” UBS chairman Colm Kelleher told reporters.

“It is absolutely crucial for the economic structure of Switzerland and … for global finance,” he told reporters.

Desperate to prevent the meltdown from spreading through the global financial system on Monday, Swiss authorities began the search for a private sector solution, with limited government support, while reportedly considering Plan B – a full or partial nationalization.

“Given recent extraordinary and unprecedented circumstances, the announced merger represents the best available outcome,” Credit Suisse Chairman Axel Lehmann said in a statement.

“This has been an extremely challenging time for Credit Suisse, and while the team has worked tirelessly to address many significant past issues and execute its new strategy, we are compelled to reach a solution today that delivers a lasting result.”

The emergency takeover was agreed after several days of hectic negotiations involving financial regulators in Switzerland, the US and the UK. UBS (UBS) and Credit Suisse are among the 30 most important banks in the global financial system, and together they have nearly $1.7 trillion in assets.

Financial regulators around the world cheered UBS’s move to take over Credit Suisse.

US authorities said they supported the move and worked closely with the Swiss central bank to assist the takeover.

“We welcome the announcements by the Swiss authorities today to support financial stability,” US Treasury Secretary Janet Yellen and Federal Reserve Chairman Jerome Powell said in a joint statement. “The capital and liquidity positions of the US banking system are strong and the US financial system is resilient.”

Christine Lagarde, president of the European Central Bank, said the banking sector remains resilient, but the ECB stands ready to help banks have enough cash available to fund their operations should the need arise.

“I welcome the swift action and decisions taken by the Swiss authorities,” Lagarde said. “They are instrumental in restoring orderly market conditions and ensuring financial stability.

The Bank of England said it welcomed the measures taken by Swiss authorities “to support financial stability.”

“We have been in close engagement with international counterparts throughout the preparations for today’s announcements and will continue to support their implementation,” it said in a statement. “The UK banking system is well capitalized and funded, and remains safe and sound.”

The global headquarters of UBS and Credit Suisse are just 300 meters apart in Zurich, but the banks’ fortunes have been on very different paths recently. Shares in UBS have climbed 15% over the past two years, and it posted a profit of $7.6 billion in 2022. It had a market capitalization of about $65 billion on Friday, according to Refinitiv.

Credit Suisse shares have lost 84% of their value over the same period, and last year saw a loss of $7.9 billion. It was worth just $8 billion at the end of last week.

Credit Suisse dates back to 1856 and has its roots in the Schweizerische Kreditanstalt (SKA), which was created to finance the expansion of the railway network and the industrialization of Switzerland.

As well as being Switzerland’s second largest bank, it looks after the wealth of many of the world’s richest people and offers global investment banking services. It had more than 50,000 employees by the end of 2022, 17,000 of them in Switzerland.

The Swiss National Bank said it would provide a 100 billion Swiss franc ($108 billion) loan to UBS and Credit Suisse to boost liquidity.

UBS CEO Ralph Hamers will become CEO of the combined bank, and Kelleher will serve as chairman.

The takeover will strengthen the position of UBS as the world’s leading wealth manager with $5 trillion of invested assets, and increase its ambition to grow in the Americas and Asia. UBS said it expects to generate cost savings of $8 billion per year by 2027. Credit Suisse’s investment bank is in the crosshairs.

“Let me be clear. UBS intends to reduce Credit Suisse’s investment banking business and align it with our conservative risk culture,” Kelleher said.