UBS, the largest bank in Switzerland, has agreed to buy its biggest rival Credit Suisse for approximately $3.2 billion, in a move that has been brokered by the Swiss government.
The 166-year-old Credit Suisse, once the pride of the Swiss financial system, has been under intense pressure as customers withdrew their deposits and the share prices continued to fall. It decided to borrow up to 50 billion francs ($54 billion) from the government failed to reassure investors, and after a brief move up, the shares fell another eight percent on Friday to close at 1.86 Swiss Francs.
In addition to the general panic spreading around the financial systems in the world following the recent collapse of Silicon Valley Bank (SVB), there were two recent factors that hastened the fall of Credit Suisse, which has been involved in various scandals and regulatory issues over the past decade.
Last Tuesday, the bank disclosed that there were “material weaknesses” in its financial reporting. A day later, Ammar al-Khudairy, chairman of Saudi National Bank, said his bank would not be able to invest more money in the Swiss lender after reaching a regulatory threshold of 9.9 percent.
Swiss President Alain Berset said the deal was “one of great breadth for the stability of international finance” and added that an uncontrolled collapse of Credit Suisse would “lead to incalculable consequences for the country and the international financial system”.
Colm Kelleher, UBS chairman, proclaimed on Sunday: “This is a historic day in Switzerland, but frankly, a day we hoped would not come.”
Guarantee for liquidity assistance from SNB to Credit Suisse
The Swiss Federal Council, in a statement, welcomed the planned takeover.
“To strengthen financial market stability until the takeover is complete, the federal government is providing a guarantee for additional liquidity assistance from the Swiss National Bank (SNB) to Credit Suisse. This support is intended to secure the liquidity of Credit Suisse and thus also ensure the successful implementation of the takeover. The Federal Council is taking this measure in order to protect financial stability and the Swiss economy,” it said in a statement.
The Federal Council said it has created the necessary legal basis for the SNB to be able to provide Credit Suisse with additional liquidity assistance. It has decided to give the SNB a default guarantee for liquidity assistance. Both of these measures were taken on the basis of Articles 184 and 185 of the Federal Constitution (emergency law).
In order to reduce any risks for UBS, the federal government is also granting UBS a guarantee in the amount of CHF 9 billion to assume potential losses arising from certain assets that UBS takes over as part of the transaction, should any future losses exceed a certain threshold.
The Federal Council added in its statement that it has taken precautions to minimise the risk for the Confederation. “Credit Suisse is thus required to pay a risk premium to both the federal government and the SNB, a commitment premium to the federal government for providing the default guarantee, and interest to the SNB. Together with the bankruptcy privilege rights, this means that the Confederation’s default risk exposure is low,” it added.
Under the terms of the deal, UBS will pay 0.76 of one of its shares for each share of Credit Suisse, valuing it at about 3 billion Swiss francs ($3.2 billion).
Credit Suisse Chairman Axel Lehmann added: “It is a historic, sad and very challenging day for Credit Suisse, for Switzerland and for the global financial markets.”
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