UBS Acquires Credit Suisse

March 22, 2023

The collapse of the investment bank Silicon Valley Bank (SVB) has brought worries about possible risks to both the American and European financial sectors. Although the EU has attempted to play down the chance of this incident having a ripple effect on their markets and banks, it has had a significant impact on Credit Suisse (CS). As a result, Switzerland’s largest bank, UBS, has agreed to acquire Credit Suisse, prompting questions about how this could have happened and if this acquisition can ensure financial stability and protect Switzerland’s economy.

Background

Founded in 1856, Credit Suisse (CS) has been the stable pillar of the Swiss financial sector. While the image of stability and professionalism was evident in the global financial landscape, Credit Suisse had issues maintaining its reputation. In early 2021, Credit Suisse had “seriously breached its supervisory obligations” in its business relationship with Lex Greensill. In this light, the Swiss lender’s exposure to Greensill Capital “led to massive reimbursements to investors after the supply chain finance firm collapsed” negative exposure to the finance company Greensill Captial.

Moreover, Credit Suisse was found guilty of money-laundering charges, and had, mainly in the last months, a decrease in customer confidence resulting in billions being withdrawn. Further, 2022 marks its worst loss since the global financial crisis, and with the confidence collapsing last week, Credit Suisse acknowledged its “material weakness” in bookkeeping relating to the fear in the banking sector and argued that the soaring interest rates have undermined the value of some financial assets. These factors are also seen in CVB and Signature Bank. To juxtapose, Credit Suisse could singlehandedly withstand the 2008 banking crisis, showcasing the stability and expertise of management.

With all these doubts and issues, Credit Suisse saw its stocks plummet by over 21% due to the SVB collapse Wednesday 15 March, The top shareholder, the Saudi National Bank, was not willing to provide further financial assistance. The bank, which owns almost 10% of Credit Suisse, implied that Credit Suisse was devoted to its resources. The lack of trust and assistance resulted in Credit Suisse’s shares going into free fall. The shares fell 25% over the last week, and, to make matters worse, account holders were withdrawing deposits of more than $10 billion per day.

$54 billion in financial support and a statement of confidence from the Swiss National Bank tried to save the Swiss banking reputation but that did not yield the expected result. Economist Nouriel Roubini warned that if Credit Suisse were to collapse, it could trigger a “Lehman moment,” similar to the collapse of Lehman Brothers in 2007 which marked the beginning of the global financial crisis. While the initial spillover from the Silicon Valley Bank (SVB) to the European landscape got heavily criticised and even downplayed by the European Commission, the financial instability continues.

Too Big to Fail?

2008’s financial crisis buffeted many banks worldwide. However, Credit Suisse survived this harsh environment without a government bailout. As a result, this increased the trustworthiness and emphasised the stability of Credit Suisse. In retrospect, Zurich-based UBS, the long-standing rival and saviour of CS, was designated a state fund to keep body and soul together.

After the financial crisis, currently, 15 years ago, Switzerland introduced measures to prevent the collapse of the bank in another scenario of a banking crisis. Intending to never let the Swiss taxpayer have to bail out another Swiss bank, Switzerland enabled the “too big to fail” laws. These laws, applicable to the biggest banks in the country, implied that big banks should have enough funds and resources to maintain stability in unstable situations. Yet, Credit Suisse followed these strict regulations and had enough capital to prevent the catastrophe.

The Swiss National Bank and the financial regulations always keep an eye on the biggest, and therefore the most important, banks in Switzerland. In the case of a disaster, these authorities can assist and intervene to prevent financial damage to be done. However, in the last week, it seems like the whole situation was downplayed. Whereas European countries and global experts would be concerned about Credit Suisse’s situation on the fall of shares and stocks, the Swiss newspapers and media, according to Foulkes (BBC), ignored the headlines in financial articles and rather “debate over how much support neutral Switzerland should be offering to Ukraine”.

This lack of media attention correlates with the beyond-saving Credit Suisse. People get informed when it was too late to make any changes to the unfortunate destiny of this all-time pillar of the Swiss banking world. Following Silicon Valley Bank and Signature Bank in the United States, the “slow-rolling crisis”, as expected by various experts, continues in Europe in the form of Credit Suisse. Following this perspective, Swiss President Berset emphasises the disaster and the high level of anxiety: “an uncontrolled collapse of Credit Suisse would lead to incalculable consequences for the country and the international financial system”.

Acquisition

In an attempt to “halt a dangerous decline in confidence in the global banking system”, UBS, also ranked among the top 30 most important banks in the global financial systems on par with Credit Suisse, takes over Credit Suisse for more than $3 billion. Whereas UBS labels this as a takeover, Credit Suisse is utterly humiliated and calls it an “acquisition”. In general, the price UBS is paying for the takeover is 60% less than the bank was worth when the markets closed last Friday. The biggest banking deal in years, between long-time rivals, should create rest and customer confidence as “this particular event once again reminds and recalls the past uncertainty in terms of their business strategies”. Cheruvu continues to Bloomberg Television that “investors primarily want the stability of business operations of their wealth managers and wealth advisors.” Nowadays, not only the business but the whole industry have the advantage in well-managed banks.

Credit Suisse’s collapse does not only mean that rival UBS takes over the company and publicly humiliates the bank, but also possibly thousands of jobs will be lost and the Credit Suisse shareholders will be largely wiped out. The latter, the stakeholders, will receive the equivalent of 0.76 swiss France in UBS shares for stocks that were previously 1.86 on Friday. The owners of the $ 17 billion worth of “additional tier one” bonds, which are seen as a riskier class of bank debt, will lose everything according to the Swiss regulators. In this unique occurrence, the shareholders have no rights in the approval of the takeover. The Swiss government, according to BBC Business, agreed to change the laws and remove any uncertainty about the deal.

Since both UBS and Credit Suisse have branches in about every Swiss town, UBS might want to try to allocate jobs. However, it is speculated that thousands of jobs will be gone after the takeover.

UBS chairman Colm Kelleher, mentions that “this acquisition is attractive for UBS shareholders but, let us be clear, as far as Credit Suisse is concerned, this is an emergency rescue”, hinting at the rather safety for shareholders by transferring the investments to UBS shares. Following the initial concerns about the slow collapse of the financial structures in America after the collapse of the Silicon Valley Bank, the CEO sees the necessity for stability since “it is absolutely essential to the financial structure of Switzerland and… to global finance”.

Financial market regulators are delighted about UBS’s action to take over Credit Suisse. The US authorities supported and worked closely with the Swiss central bank in this acquisition. Highlighting the impact of the collapse of the three banks, US Treasury Secretary Janet Yellen and Federal Reserve Chair Jerome Powell share in a joint statement that “We [America] welcome the announcements by the Swiss authorities today to support financial stability”, adding that “the capital and liquidity positions of the US. Banking system are strong, and the US financial system is resilient”. Especially the swift action and decision taken to by the Swiss authorities to support this takeover are worth the praise. Maintaining global financial stability is the foundational factor in cooperation and is found in rapid action. The Bank of England shares this view and welcomed the measures “to support financial stability”.

Reputation

Switzerland’s reputation as the bakermat of financial stability has taken a big hit due to Credit Suisse’s collapse. Switzerland’s reputation as a safe place to invest with strict legislation on data sharing attracted many, mainly foreign, investors. Despite various scandals over the years related to secret accounts of dictators, money laundering or tax evading, Switzerland hold on tight to the strong and reliable feeling. However, in a couple of days, the 167-year-old bank collapsed with the result of many losing their jobs and massive losses in share value. As this could happen quickly, and the media not showcase the severity of the collapse, it could have enormous reputational damage. While the Swiss financial regulations and its government all agree that this takeover was the best solution to maintain financial stability, investors might be more hesitant to choose Switzerland as an investment country.

To predict if the trend of financial instability continues, one needs to take into account the crisis management and the previous years of the bank. Surely, as seen in Credit Suisse, the collapse can in a sudden breeze without media attention. Marking the end of an almost two-centuries-old well-established Swiss bank.

Sources

https://www.bbc.com/news/business-61957774

https://edition.cnn.com/2023/03/19/business/credit-suisse-ubs-rescue/index.html

https://www.wsj.com/articles/credit-suisse-collapse-burns-saudi-investors-3f096a07

https://www.ndtv.com/world-news/credit-suisse-crisis-sends-shivers-amongst-wealthy-indians-3881280

https://www.ft.com/content/52729d2c-8204-4bff-90e4-0e7a2a3af4d8

https://www.bbc.co.uk/news/business-61957774

https://www.cnbc.com/2023/02/28/finma-credit-suisse-seriously-breached-obligations-in-greensill-case.html

https://www.wsj.com/articles/ubs-offers-1-billion-to-take-over-credit-suisse-bfac51fa?mod=article_inline

https://www.federalreserve.gov/newsevents/pressreleases/other20230319a.htm

Photo by Mariia Shalabaieva on Unsplash

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