UBS Group AG has announced its acquisition of Credit Suisse Group AG for more than $3 billion in response to pressure from authorities looking to avoid a potentially catastrophic loss of confidence in the global banking sector.
As UBS acquires its longtime rival, this deal is the largest banking acquisition in recent years.
After a plan for Credit Suisse to borrow up to 50 billion francs ($54 billion) failed to satisfy investors and the bank clients, Swiss authorities pushed UBS to acquire its smaller rival.
Stocks of Credit Suisse and some other banks fell this week due to worries about more potentially unstable institutions in the global financial system raised by the bankruptcy of two US banks.
Authorities are concerned about the consequences if Credit Suisse fails because it is one of the 30 financial organizations considered to be globally systemically important banks.
After the 2008 financial crisis, the deal between two prominent Swiss financial institutions marks the first global megamerger of systemically important banks. Following the crisis, regulators intervened in the banking industry to split up institutions and pit them against rivals.
The Swiss government has committed over $9 billion in funding to help UBS reduce any possible losers sustained as a result of purchasing Credit Suisse. To help UBS close the deal, the Swiss National Bank has also given it more than $100 billion in liquidity.
Swiss officials were under pressure to close the deal before Asian markets opened for the week. To avoid the more difficult and potentially harmful regulator-led winddown of Credit Suisse, they needed to get approval from the boards of both banks.
The regulators were prompted into action by Credit Suisse’s increasingly bleak outlook, which is claimed to have seen outflows of up to $10 billion per day since last week.
Regulators were worried not only about the possible effects of the collapse of Credit Suisse on world stability but also about Switzerland’s potential to become a new source of diffusion.
A group of central banks, including the Federal Reserve and the Swiss National Bank, announced an enlarged dollar swap line after the UBS agreement.
Axel Lehmann, chairman of Credit Suisse, claimed that the bank was unable to weather the current challenges that originated in the United States. He said that it is obvious that Credit Suisse cannot continue to exist in its existing shape given the acceleration of the loss of trust and the deterioration of recent days.
Investors all across the world are now looking for financial system weaknesses due to the recent unexpected collapse of Silicon Valley Bank (SVB) and Signature Bank.
At the top of many of these lists was Credit Suisse, which had already been classified as a problematic institution due to many self-inflicted crises and trading losses. The failure of Greensill Capital and Archegos Capital Management in 2021 was the bank’s two most significant losses.
Investors felt that Credit Suisse’s mistakes persisted despite several leadership changes and promises to do better. The bank’s new management, which took over last year and included many former UBS employees, moved to reassure clients and put the bank’s restructuring plan into action.
Credit Suisse completed a significant restructuring last year and obtained $4 billion in shares from investors, including Saudi National Bank. But, customers were systematically departing the bank in the fourth quarter of 2022, taking $120 billion in managed assets with them.
The Swiss National Bank on Thursday threw Credit Suisse a $54 billion lifeline as its bonds and the stock price fell. The liquidity line was doubled later that day to ensure the bank’s survival until the weekend.
But, Swiss authorities and regulators who oversee the bank’s operations in the US, UK, and the EU were concerned that the bank would go bankrupt this week if the situation wasn’t addressed and that other banks might see a similar decline in confidence.
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The Swiss financial regulator Finma claims that Credit Suisse experienced a confidence crisis and that the bank might experience a liquidity issue even if it remained solvent. It was essential for the authorities to act to avoid harm to the Swiss and worldwide financial markets.
Following the conversations between regulators and the two banks, which started on Wednesday, Finma affirmed that both banks would do their regular business as usual on Monday without any restrictions or interruptions. Regulators provided two options: bankruptcy or acquisition.
UBS management was concerned that bankruptcy would harm the reputation of Swiss banking because it would be a tough process. It prompted more urgent discussions regarding a potential settlement with Swiss authorities.
With the numerous scandals and problems that Credit Suisse faced, UBS has never wanted to be forced into a merger with them. The massive investment bank of Credit Suisse was the opposite of the equity business model that UBS had been employing for years, which focused on fees for handling the accounts of affluent clients.
Following the terms of the all-share transaction, holders of Credit Suisse shares will get one UBS share for every 22.48 shares they own, or CHF 0.76 per share, for a total consideration of CHF 3 billion. By 2027, it is expected that the merging of two companies will result in cost savings of more than USD 8 billion annually.
Accelerating strategic ambitions in global banking while managing the remainder of Credit Suisse’s Investment Bank will help UBS Investment Bank strengthen its position as a leader in the global competitive landscape with institutional, corporate, and wealth management clients.
According to UBS, the deal should boost EPS by 2027, and the bank’s capitalization is still significantly higher than its goal level of 13%.
Credit Suisse manages the money of many of the wealthiest people in the world and provides international investment banking services, in addition to being Switzerland’s second-largest bank. By the end of 2022, it employed more than 50,000, with 17,000 of them working in Switzerland.
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