June 24, 2024

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UBS buys Credit Suisse in an effort to stop the banking crisis

UBS buys Credit Suisse in an effort to stop the banking crisis

London (CNN) Switzerland’s largest bank, UBS, has agreed to buy it Credit Suisse’s ailing competitor In an emergency rescue deal aimed at stemming the panic in financial markets that unleashed the failure of two US banks earlier this month.

“Today UBS announces the acquisition of Credit Suisse,” the Swiss National Bank said in a statement on Sunday. She said the bailout would secure financial stability and protect the Swiss economy.

UBS is paying 3 billion Swiss francs ($3.25 billion) to Credit Suisse, some 60% less than the bank’s value when markets closed on Friday. Credit Suisse shareholders will be largely wiped out, receiving the equivalent of just 0.76 Swiss francs in UBS shares for 1.86 Swiss francs worth of shares on Friday. Swiss regulators said holders of $17 billion of “additional Tier 1” notes – a much riskier class of bank debt – would lose everything.

Unusually, the deal would not need shareholder approval after the Swiss government agreed to change the law to remove any doubt about the deal.

Credit Suisse (C.S) It has lost the confidence of investors and customers for years. In 2022, it recorded its worst loss since the global financial crisis. But confidence collapsed last week after it admitted there was a “material weakness” in bookkeeping. The demise of Silicon Valley Bank and Signature Bank has also spread fear of institutional weakness at a time when rising interest rates have undermined the value of some financial assets.

Shares in the 167-year-old bank fell 25% for the week, money poured out of the investment funds it managed, and account holders were withdrawing more than $10 billion in deposits a day, the Financial Times reported. An emergency loan of almost $54 billion from the Swiss National Bank failed to stem the bleeding.

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But Swiss officials said Sunday night it had “built a bridge” to the end of the week to allow the rescue operation to be put together.

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

“It is absolutely essential to the financial structure of Switzerland and … to global finance,” he told reporters.

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

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

“This has been a very difficult time for Credit Suisse, and while the team has worked tirelessly to address many important old problems and implement its new strategy, today we are forced to come up with a solution that delivers a lasting outcome.”

The emergency takeover was agreed upon after days of frantic negotiations involving financial regulators in Switzerland, the US and the UK. UPS (UPS) 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.

Regulators applaud the takeover

Financial market regulators around the world have welcomed UBS’ acquisition of Credit Suisse.

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

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“We welcome the Swiss authorities’ announcements today in support of financial stability,” US Treasury Secretary Janet Yellen and Federal Reserve Chair Jerome Powell said in a joint statement. “Capital and liquidity centers in the US. The banking system is strong, and the US financial system is resilient.”

European Central Bank President Christine Lagarde said the banking sector remains resilient but the ECB stands ready to help banks maintain enough liquidity to fund their operations if the need arises.

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

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

“We have worked closely with our international counterparts during the preparations for today’s announcements and will continue to support their implementation,” she said in a statement. “The UK banking system is well capitalized and funded, and remains safe and sound.”

How UBS and Credit Suisse will fit together

The global headquarters of UBS and Credit Suisse are just 300 yards apart in Zurich, but the banks’ fortunes have been on very different paths lately. Shares of UBS are up 15% in the past two years, earning $7.6 billion in 2022. The stock market was valued at about $65 billion on Friday, according to Refinitiv.

Credit Suisse shares lost 84% of their value over the same period, and last year recorded a loss of $7.9 billion. It was worth $8 billion just this past weekend.

UBS CEO Ralph Hammers will lead the newly merged giant bank.

Credit Suisse dates back to 1856, and has its roots in the Schweizerische Kreditanstalt (SKA), which was set up to finance the expansion of Switzerland’s rail network and industrialization.

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In addition to being the second largest bank in Switzerland, it looks after the fortunes of many of the world’s richest people and provides global investment banking services. It had more than 50,000 employees at the end of 2022, 17,000 of them in Switzerland.

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

UBS CEO Ralph Hammers will be CEO of the combined bank, and Kelleher will serve as chairman.

The acquisition will strengthen UBS’ position as the world’s leading wealth manager with $5 trillion in invested assets, and bolster its ambition for growth in the Americas and Asia. UBS said it expects to achieve cost savings of $8 billion annually by 2027. Credit Suisse investment bank is in the crosshairs.

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