Banking giant UBS acquires Credit Suisse for $3.2 billion

Swiss President Alain Berset announced on March 19, 2023 that banking giant UBS is buying its smaller rival Credit Suisse for $3.2 billion in an effort to avoid further market turmoil in global banking.

Mr Berset called the announcement “one of the great broadsides for the stability of international finance”. The uncontrolled collapse of Credit Suisse would have incalculable consequences for the country and the international financial system.

The Swiss Federal Council, a seven-member governing body that includes Mr. Berset, passed an emergency ordinance that allows mergers without shareholders’ approval.

Axel Lehman, chairman of Credit Suisse, called the deal “a clear turn”.

“This is a historic, sad and very challenging day for Credit Suisse, for Switzerland and for the global financial markets,” Mr Lehmann said, adding that the focus is now on the future and in particular the 50,000 Credit Suisse employees. , is at 17,000. of which are in Switzerland.

The chairman of UBS, Colm Kelleher, hailed the “huge opportunities” emerging from the acquisition, and highlighted his bank’s “conservative risk culture” – a subtle swipe at a Credit Suisse culture known for the more swashbuckling, the bigger. Risky gamble on returns. He said the combined group would create a wealth manager with more than $5 trillion in total invested assets.

Mr Berset said the council had agreed to guarantee Credit Suisse a total of 150 billion francs ($162 billion) in liquidity, far higher than the publicly announced figure of 50 billion Swiss francs ($54 billion). Is. But it didn’t appear to be enough. “We noted that the outflow of liquidity and the volatility of the markets demonstrated that the necessary confidence could no longer be restored, and a quick solution that guaranteed stability was necessary.”

Swiss Finance Minister Karin Keller-Sutter said the council “regrets that the bank, which was once a model institution in Switzerland and part of our strong position, was able to get into this situation”.

The combination of the two largest and best-known Swiss banks, each of which has a history dating back to the mid-19th century, is a thunderbolt for Switzerland’s reputation as a global financial center – giving it the status of a single national champion. In banking except at the mouth.

While UBS is buying Credit Suisse, UBS executives said they plan to sell parts of Credit Suisse or reduce the size of the bank in the coming months and years.

The Swiss central bank has agreed to provide a loan of 100 billion Swiss francs ($108 billion) backed by a federal default guarantee to support the deal, which is expected to be completed by the end of the year.

Mr Berset said the Federal Council – Switzerland’s executive branch – had been discussing a long-standing troubled situation at Credit Suisse since the start of the year, and held urgent meetings over the past four days amid growing concerns about its financial health. Which became the main reason. Its share price swooped in and raised the specter of the 2007–2008 financial crisis.

Investors and banking industry analysts were still digesting the deal, but one analyst soured on the news because of the reputational damage it would do to Switzerland’s image as a global banking center.

Octavio Marenzi, CEO of consulting firm Opimas LLC, said in an email: “A nationwide reputation for prudent financial management, sound regulatory oversight, and, frankly, being somewhat dull and boring with regards to investing has been eroded. “

Mr Merenzi said he expected a court and ballot challenge to the deal as a result of Switzerland’s government model of direct democracy, potentially leading to more chaos.

Credit Suisse has been designated by the Financial Stability Board, an international body that oversees the global financial system, as one of the world’s most important globally organized banks. This means that regulators believe that its uncontrolled failure will create ripples throughout the financial system, not unlike the collapse of Lehman Brothers 15 years ago.

The deal follows the collapse of two big US banks last week, which prompted a frantic, sweeping response from the US government to prevent any further bank panics. Nevertheless, global financial markets are on the upswing since Credit Suisse’s share price began to decline this week.

Many of Credit Suisse’s problems are unique and do not overlap with the weaknesses that brought down Silicon Valley Bank and Signature Bank, whose failures led to a significant rescue effort by the Federal Deposit Insurance Corporation and the Federal Reserve. As a result, their collapse does not necessarily signal the start of the 2008 financial crisis.

The deal caps a highly volatile week for Credit Suisse, especially on March 15 when its shares fell to a record low after its biggest investor, the Saudi National Bank, said it was closing the bank to avoid tripping rules. I will not invest any more money. It will kick in if its share rises by about 10%.

On 17 March the shares closed at 1.86 francs ($2), down 8% on the Swiss exchange. The stock has seen a long decline: it traded at over 80 francs in 2007.

Its current troubles began after Credit Suisse reported on March 14 that managers had identified “material weaknesses” in the bank’s internal controls over financial reporting dating back to the end of last year. This raised fears that Credit Suisse would be the next domino to fall.

Despite being smaller than its Swiss rival UBS, Credit Suisse still wields considerable influence with $1.4 trillion in assets under management. The firm has significant trading desks around the world, caters to the wealthy and wealthy through its wealth management business, and is a leading advisor to global companies in mergers and acquisitions. Notably, Credit Suisse did not require government support during the financial crisis in 2008, while UBS did.

Despite the banking turmoil, the European Central Bank approved a large, half-percentage point increase in interest rates on 16 March, saying Europe’s banking sector remained “resilient” with strong finances.

ECB President Christine Lagarde said banks are “in a completely different position than in 2008” during the financial crisis, partly due to tighter government regulation.

The Swiss bank is pushing for a new strategy to raise money from investors and overcome a string of troubles including bad bets on hedge funds, repeated shake-ups of its top management and a spying scandal involving UBS .

US Fed Chairman, Treasury Secretary welcome acquisition

The US Fed Chairman and Treasury Secretary welcomed the news.

“We welcome the announcements made by the Swiss authorities today to support financial stability,” Fed Chairman Jerome Powell and Treasury Secretary Janet Yellen said in a joint statement after the Swiss president announced the takeover.

“The US banking system’s capital and liquidity position is strong, and the US financial system is resilient,” the statement said.

“We are in close contact with our international counterparts to support their implementation,” it added.

Christine Lagarde, president of the European Central Bank, welcomed the “swift action” by the Swiss authorities. “I welcome the swift action and decisions taken by the Swiss authorities,” Lagarde said in a statement. “They are important for restoring orderly market conditions and ensuring financial stability. The euro area’s banking sector is resilient with strong capital and liquidity conditions,” she said.


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