UBS agreed to buy rival Credit Suisse. for 3 billion Swiss francs ($3.2 billion) on Sunday, with Swiss regulators playing a vital role in the purchase as nations sought to halt a global banking system contagion.
“With the takeover of Credit Suisse by UBS, a solution has been found to secure financial stability and protect the Swiss economy in this exceptional situation,” said the Swiss National Bank in a statement, noting that the central bank collaborated with the Swiss government and the Swiss Financial Market Supervisory Authority to bring the country’s two largest banks together.
According to the terms of the agreement, Credit Suisse shareholders would get one UBS share for every 22.48 Credit Suisse shares they own.
“Although this deal is appealing to UBS shareholders, it should be noted that it represents an emergency rescue for Credit Suisse. “We have crafted a transaction that will protect the remaining value in the firm while minimizing our downside exposure,” UBS Chairman Colm Kelleher said in a statement.
According to UBS, the combined bank will have $5 trillion in invested assets.
“We are dedicated to making this transaction a huge success. “There are no options in this,” Kelleher remarked during a press conference when asked if the bank could back out of the arrangement. “This is vitally critical to Switzerland’s financial framework and… to global finance.”
To fund the transaction, the Swiss National Bank committed a loan of up to 100 billion Swiss francs ($108 billion). The Swiss government also guaranteed to accept losses of up to 9 billion Swiss francs from specific assets that exceeded a predetermined threshold “in order to limit any risks for UBS,” according to a second government statement.
“This is a business solution, not a bailout,” said Swiss Finance Minister Karin Keller-Sutter at a press conference on Sunday.
The UBS agreement was thrown together quickly before markets reopened on Monday after Credit Suisse shares suffered their greatest weekly fall since the coronavirus outbreak began. The losses occurred despite the Swiss central bank granting a new loan of up to 50 billion Swiss francs ($54 billion) last week in an effort to arrest the fall and restore trust in the bank.
Treasury Secretary Janet Yellen and Federal Reserve Governor Jerome Powell both issued statements welcoming the news of the agreement. “The capital and liquidity levels of the U.S. banking system are robust, and the U.S. financial system is resilient. “We have been in frequent contact with our overseas peers to assist them with their implementation,” they stated.
Credit Suisse had already been dealing with a spate of losses and controversies, and confidence had been shaken anew in the last two weeks as banks in the United States grappled with the failures of Silicon Valley Bank and Signature Bank.
The backstop of uninsured deposits in insolvent banks provided by US authorities, as well as the establishment of a new funding mechanism for weak financial institutions, failed to dampen the shock, which threatens to engulf more banks both in the US and overseas.
In a news conference, Credit Suisse Chairman Axel Lehmann stated that the financial instability caused by the failed smaller banks in the United States hit the bank at the wrong time.
Despite the presence of authorities, the acquisition provides UBS the freedom to run the acquired assets as it sees fit, which might result in large job cutbacks, according to sources who spoke to CNBC’s David Faber.
Credit Suisse has a significantly larger scope and potential impact on the global economy than smaller banks in the United States, putting pressure on Swiss regulators to find a method to merge the country’s two largest financial companies. Credit Suisse’s balance sheet, at over 530 billion Swiss francs as of the end of 2022, is roughly double the size of Lehman Brothers when it failed. It is also significantly more globally interconnected, with many international subsidiaries, making Credit Suisse’s predicament even more critical.
Bringing the two rivals together was not without difficulties, but the need to avoid a systemic collapse ultimately won out. According to several media sources, UBS initially proposed to buy Credit Suisse for roughly $1 billion on Sunday. Credit Suisse reportedly rejected the offer, claiming it was too low and would harm shareholders and employees, according to sources familiar with the situation.
Sources told CNBC’s Faber that by Sunday afternoon, UBS was in talks to buy the bank for “significantly” more than 1 billion Swiss francs. He stated that the price of the transaction climbed throughout the day’s negotiations.
Credit Suisse lost over 38% of its deposits in the fourth quarter of 2022, and the bank acknowledged in its delayed annual report released earlier this week that the outflows had yet to reverse. It announced a 7.3 billion Swiss franc net loss for 2022 and expects another “substantial” loss in 2023.
In order to address these long-standing challenges, the bank had already planned a substantial strategic revamp, with current CEO and Credit Suisse veteran Ulrich Koerner taking over in July.