UBS will acquire Credit Suisse in a deal that aims to stem what was quickly becoming a global confidence crisis.
Credit Suisse, a 167-year-old troubled lender, was brought to the brink by financial calamity last Wednesday, despite receiving a $54bn (PS44bn), credit linefrom Switzerland’s central banks.
Although the credit line was established in an attempt to reassure markets and depositors, it did not stop a flood of customer withdrawals. The Swiss government requested that the UBS rival be considered a takeover.
UBS will buy Credit Suisse for 3bn Swiss Francs (PS2.6bn).
One part of the deal includes 100 billion Swiss francs (PS88.5bn), which will be used to provide liquidity assistance for both banks.
Colm Kelleher (chairman of UBS Group) said that the deal “represents tremendous opportunities”, and added that Credit Suisse’s long-term goal would be to reduce its investment banking business and align it the UBS “conservative culture”.
Credit Suisse chairman Axel Lehmann described the day as “historical, sad, and very challenging” for his bank, Credit Suisse, and the global market.
He stated that the merger announced was the best outcome possible, given recent extraordinary and unpredicted circumstances.
“This has been a very difficult time for Credit Suisse. While the team worked tirelessly to address many legacy issues and implement its new strategy, today we have to find a solution that will last.”
The Swiss central bank and other officials stated that the agreement was “a solution…to ensure financial stability and protect Swiss economy in this extraordinary situation”.
It is also hoped UBS’s acquisition of its old rival will prevent the spread of the same financial crisis that occurred in 2008.
While this is a major deal, there are still huge risks in the global financial sector.
The combination brings together two of Switzerland’s largest banks, but also two of the most important financial institutions around the globe.
During the press conference, there was mention of discussions with Jeremy Hunt the British chancellor.
This underscores the importance of this deal, as financial regulators and governments around the globe race to stop the worst crisis in the banking sector of the past 15 years.
The Swiss government had always opposed this deal. Although it had been speculated many times in the past decade, the Swiss government wanted two national banking champions.
Let’s not forget that all parties to this deal were effectively coerced into signing it by Credit Suisse’s crisis of confidence, which has been brewing for some time.
UBS was effectively coerced into agreeing to this deal by the Swiss government. Credit Suisse has also been forced to accept the deal. There won’t be any shareholder vote.
This deal was the only option. If the financial markets opened in Asia on Monday, then in Europe, there would be some form of resolution or nationalization of Credit Suisse. This would have exacerbated the crisis.
This government-orchestrated rescue does avert the collapse of a major global bank but while it might be tempting to believe this draws a line under this banking crisis, remember that a week ago HSBC stepped in to buy the British arm of Silicon Valley Bank for PS1 after its American parent collapsed, and a number of other mid-sized US banks have been forced to seek emergency support in the last 10 days.
This is a stark reminder that global financial system continues to face huge risks as global inflationary pressures increase and interest rates rise sharply.
The US and UK central banks welcomed the news.
According to the Bank of England, “We have been working closely with international counterparts during preparations for today’s announcements and will continue supporting their implementation.”
“The UK’s banking system is safe and sound, with a well-capitalized and adequately funded structure.”
Credit Suisse is one the largest wealth managers in the world and also ranks among the 30 banks considered systemically important. This means that the deal will likely ripple across global markets on Monday.
It employs approximately 5,000 people and is one of the biggest investment banking companies in London.
This comes after a tough few weeks for banks, which saw the collapse of US lenders Silicon Valley Bank & Signature Bank.
SVB’s UK branch was rescued from HSBC by PS1. However, a number other American lenders were also forced to apply for emergency funding.