UBS agreed to buy rival Swiss bank Credit Suisse for 3 billion Swiss francs (US$3.23 billion) in stock and agreed to assume up to 5 billion Swiss francs (US$5.4 billion) in losses, in a shotgun merger engineered by Swiss authorities to avoid more market-shaking turmoil in global banking.
The deal includes 100 billion Swiss francs (US$108 billion) in liquidity help for UBS and Credit Suisse from the Swiss central bank.
To enable UBS to take over Credit Suisse, the federal government is providing a loss guarantee of a maximum of 100 billion Swiss francs (US$9.7 billion) for a clearly defined part of the portfolio, the government said.
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This will be activated if losses are actually incurred on this portfolio. In that eventuality, UBS would assume the first 5 billion Swiss francs (US$5.41 billion), the federal government the next 9 billion francs (US$6.38 billion), and UBS would assume any further losses, the government said.
Switzerland’s regulator FINMA said that there was a risk that Credit Suisse could have become “illiquid, even if it remained solvent, and it was necessary for the authorities to take action”.
Credit Suisse Additional Tier 1 shares with a nominal value of around 16 billion Swiss francs (US$17.2 billion) will be written down completely after the Swiss government provided support for UBS’ takeover of Credit Suisse, FINMA said.
The 167-year-old Credit Suisse has been the biggest name ensnared in market turmoil unleashed by the recent collapse of US lenders Silicon Valley Bank and Signature Bank, forcing it to tap US$54 billion in central bank funding last week.
Switzerland’s President Alain Berset, right, with United Nations Secretary General Antonio Guterres at the United Nations headquarters in New York on March 6. Photo: EPA-EFE alt=Switzerland’s President Alain Berset, right, with United Nations Secretary General Antonio Guterres at the United Nations headquarters in New York on March 6. Photo: EPA-EFE>
“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,” the Swiss central bank said.
Authorities had been scrambling to rescue Credit Suisse, among the world’s largest wealth managers, before financial markets reopened on Monday.
UBS and Credit Suisse are both in a group of the 30 global systemically important banks watched closely by regulators, and Credit Suisse’s failure would ripple throughout the entire financial system.
The announcement came in a make-or-break weekend after some rivals grew cautious in their dealings with the struggling Swiss lender, and its regulators urged it to pursue a deal with UBS.
FINMA, which said it had approved the takeover, said recent measures to stabilise itself were “not enough to restore confidence in the bank, however, and more far-reaching options were also examined.”
The two banks’ fortunes have diverged sharply over the past year. UBS earned US$7.6 billion in profit in 2022, while Credit Suisse lost US$7.9 billion. Credit Suisse’s shares are down 74 per cent from a year ago, while UBS’s are relatively flat.
The Swiss government said it was also giving UBS a guarantee of 9 billion Swiss francs (US$6.38 billion) “assume potential losses” from assets as part of the transaction.
UBS’s CEO Ralph Hamers and chairman Colm Kelleher will remain at the helm of the combined bank.
“The transaction reinforces UBS’s position as the leading universal bank in Switzerland,” UBS said.
UBS chairman Colm Kelleher in Bern, Switzerland on Sunday. Photo: AFP alt=UBS chairman Colm Kelleher in Bern, Switzerland on Sunday. Photo: AFP>
Executives foreshadowed structural changes in the offing.
Kelleher said it would wrap up running Credit Suisse’s investment bank, but added that it was too early to say anything about potential job cuts.
Kelleher also said they would keep Credit Suisse’s domestic business, despite speculation that it could be spun off amid competition concerns.
“Credit Suisse Bank is a very fine asset we are determined to keep,” Kelleher said.
Credit Suisse’s chairman Axel Lehmann called the merger the “best available outcome”.
Swiss National Bank chairman Thomas Jordan in Bern, Switzerland on Sunday. Photo: AFP alt=Swiss National Bank chairman Thomas Jordan in Bern, Switzerland on Sunday. Photo: AFP>
Credit Suisse told employees in a memo on Sunday that there would be no immediate impact on its clients and that its day-to-day working operations were unaffected.
“Our branches and our global offices will remain open,” the bank said in a memo sent globally and seen by Reuters
The two banks’ fortunes have diverged sharply over the past year. UBS earned US$7.6 billion in profit in 2022, while Credit Suisse lost US$7.9 billion. Credit Suisse’s shares are down 74 per cent from a year ago, while UBS’s are relatively flat.
The Swiss Bank Employees Association said there was “a great deal at stake” for the 17,000 Credit Suisse staff, “and therefore also for our economy”.
“In addition, tens of thousands of jobs outside of the banking industry would potentially be at risk,” it said, calling for a task force to be established to manage the situation.
Like UBS, Credit Suisse is one of 30 banks around the world deemed to be Global Systemically Important Banks – of such importance to the international banking system that they are considered too big to fail.
But the market movement seemed to suggest the bank was being perceived as a weak link in the chain.
“We are now awaiting a definitive and structural solution to the problems of this bank,” French Finance Minister Bruno Le Maire told Le Parisien newspaper.
European Central Bank President Christine Lagarde in Frankfurt, Germany on Sunday. Photo: EPA-EFE alt=European Central Bank President Christine Lagarde in Frankfurt, Germany on Sunday. Photo: EPA-EFE>
The European Central Bank remains ready to support euro zone banks with loans if needed, ECB President Christine Lagarde said on Sunday, adding that the rescue of Credit Suisse was “instrumental” for restoring calm to the markets.
Investors have been concerned about the impact of Credit Suisse’s debacle on euro zone banks despite the ECB’s repeated reassurance that lenders in the 20 countries that share the euro are solid.
Lagarde repeated that euro area banks were “resilient, with strong capital and liquidity positions” but said the central bank was ready to step in if necessary.
“Our policy toolkit is fully equipped to provide liquidity support to the euro area financial system if needed and to preserve the smooth transmission of monetary policy,” she said in a statement.
The UK Government welcomes the steps taken today by the Swiss authorities in relation to Credit Suisse to support financial stability. The Bank of England has confirmed the UK banking system remains safe, sound and well capitalised. https://t.co/r2H8iFB48u
– Jeremy Hunt (@Jeremy_Hunt) March 19, 2023
Britains’ finance minister Jeremy Hunt said on Twitter: “The UK Government welcomes the steps taken today by the Swiss authorities in relation to Credit Suisse to support financial stability.
“The Bank of England has confirmed the UK banking system remains safe, sound and well capitalised.”
The Bank of England welcomed the takeover, indicating it would support approval of the deal, and it said the British banking system was well funded.
We welcome the comprehensive set of actions set out by the Swiss authorities today in order to support financial stability,” the BoE said in a statement, adding it would support international counterparts in implementing the actions.
“The UK banking system is well capitalised and funded, and remains safe and sound.”
London is a major financial centre and both Swiss banks have units based in Britain which are regulated by the Financial Conduct Authority (FCA) and the BoE’s Prudential Regulation Authority (PRA).
In the US, the chairman of the US Federal Reserve Jerome Powell and treasury secretary Janet Yellen released a joint statement saying: “We welcome the announcements by the Swiss authorities today to support financial stability.
“The capital and liquidity positions of the US banking system are strong, and the US financial system is resilient,” they said in a statement, adding they have been in close contact with international counterparts.
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