UBS, the biggest bank in Switzerland, reached an agreement on Sunday to purchase its troubled and longstanding competitor Credit Suisse for around $3.2 billion. This is the most dramatic attempt that has been made so far to halt the financial panic that has gripped the world over the last week.
The shocking demise of a 166-year-old organisation that was previously seen as a symbol of Swiss national pride is signalled by the transaction, which was swiftly negotiated over the course of a few days by the Swiss government. Since the global financial crisis of 2008, when former financial titans were bought by competitors in order to avert catastrophic meltdowns, this is possibly the most extensive shake-up of the global banking industry to have occurred since the crisis.
Credit Suisse was established in 1856 with the purpose of providing financing for Switzerland’s rail network. Since its inception, the company has risen to the very pinnacle of the financial industry, competing head-to-head with American heavyweights such as JPMorgan Chase.
Yet, the bank, which has its headquarters in Zurich, was also tarnished by decades of scandals, management changes, and unsuccessful efforts at reform that ruined its image, generated litigation, and left it reeling from losses. These events occurred over a period of time. As a result of the current sell-off in banking equities, which was triggered by the failure of Silicon Valley Bank earlier this month, the institution’s long-standing weaknesses were thrown into sharp view, which expedited its death, and highlights just how terrified investors are.
On Sunday, representatives of the Swiss government and authorities said that the agreement was the most efficient method to reassure investors about the soundness of the country’s financial system and the danger that its problems may spread beyond its boundaries.
During a press conference, a member of the Swiss Federal Council named Karin Keller-Sutter said that the acquisition of Credit Suisse by UBS “has established the groundwork for increased stability both in Switzerland and worldwide.”
According to the terms of the agreement, UBS will pay 0.76 of one of its shares for each share of Credit Suisse. This places the value of Credit Suisse at approximately 3 billion Swiss francs, which is equivalent to approximately $3.2 billion. This represents a relatively small portion of Credit Suisse’s market value as of Friday.
The Swiss National Bank has agreed to lend up to one hundred billion Swiss francs to UBS in order to facilitate the completion of the transaction and give the necessary financial backing. And Finma, the Swiss financial regulator, took a number of exceptional actions to assist UBS in fast absorbing its primary rival. These moves included erasing $17 billion worth of Credit Suisse’s bonds and removing the need that UBS shareholders vote on the acquisition.
Since the purchase was put together in such a rush, UBS informed analysts that the company had not had enough time to thoroughly estimate all of the financial consequences that would come from purchasing Credit Suisse.
Over the course of the last week, experts and investors have increasingly speculated that the Swiss government would compel Credit Suisse to combine with UBS in order to avert turmoil. This speculation was fueled by the falling stock price and bond yields of Credit Suisse. Nevertheless, multiple times during the day on Sunday, executives from UBS stressed the fact that the conversations were first started by Swiss government officials.
As of the past week, depositors withdrew billions of dollars worth of their money, and other financial institutions unwound deals with the bank. As a result, it became apparent to regulators that Credit Suisse might not be able to open for business in the absence of a takeover by the government or by UBS, according to one person familiar with the negotiations.
The last several months had been difficult for Credit Suisse as the company attempted to turn itself around, but two incidents that occurred last week led to its demise. On Tuesday, the financial institution made public its admission that its previous financial reporting included “serious deficiencies.” And it became caught up in the widespread anxiety that was growing about the state of the banking industry. The markets were particularly apprehensive of Credit Suisse following the failure of Silicon Valley Bank and Signature Bank, which caused share prices in financial institutions all across the globe to fall.
There has been speculation among experts that the purchase of UBS might result in legal action being taken against the company. In response, executives said that some of the most difficult concerns have been resolved by the regulatory bodies of the Swiss government.