Banking giant UBS acquires smaller rival Credit Suisse to avoid market turmoil

GENEVA, Switzerland (AP) — Banking giant UBS is buying smaller rival Credit Suisse in a bid to head off further turmoil in the global banking market, Swiss President Alain Berset announced Sunday night.

Berset, who did not specify the value of the agreement, called the announcement “of great magnitude for the stability of international finance”. An uncontrolled collapse of Credit Suisse would have incalculable consequences for the country and the international financial system.”

The Swiss president said the board had agreed to guarantee a total of 150 billion francs of liquidity to the 167-year-old bank, well above the figure of 50 billion (54 million Swiss francs) that had been publicly announced. But that didn’t seem like enough.

“We found that the liquidity outflows and market volatility demonstrated that the necessary confidence could no longer be restored and that a quick fix that guaranteed stability was essential.”

Swiss Finance Minister Karin Keller-Sutter said the board “regrets that the bank, which was once a model institution in Switzerland and part of our stronghold, could find itself in this situation.”

The combination of the two largest and best-known Swiss banks, each with historic histories dating back to the mid-19th century, amounts to a thunderbolt for Switzerland’s reputation as a global financial center – leaving it on the verge to have a single national champion in the banking sector. Part of the woes Credit Suisse has faced in recent years involved a spy scandal ordered by its executives to spy on a former colleague who moved to UBS.

Berset said the Federal Council – Switzerland’s executive arm – had already discussed a long troubled situation at Credit Suisse since the start of the year and held urgent meetings over the past four days amid concerns growing concerns about its financial health that caused major slumps in its stock price and raised the specter of the 2007-2008 financial crisis.

Credit Suisse is designated by the Financial Stability Board, an international body that monitors the global financial system, as one of the world’s systemically important banks. This means regulators believe its uncontrolled bankruptcy would have repercussions throughout the financial system, much like the collapse of Lehman Brothers 15 years ago.

Sunday’s press conference follows the collapse of two major US banks last week, which prompted a frantic and broad response from the US government to prevent any further bank runs. Yet global financial markets have been on edge since Credit Suisse’s share price began to fall this week.

Many of Credit Suisse’s problems are unique and do not overlap with the weaknesses that brought down Silicon Valley Bank and Signature Bank, whose failures led to a major bailout effort by the Federal Deposit Insurance Corporation and the Federal Reserve. Therefore, their fall does not necessarily signal the start of a financial crisis similar to the one that occurred in 2008.

The deal caps a highly volatile week for Credit Suisse, including on Wednesday when its shares plunged to a record low after its biggest investor, the Saudi National Bank, said it would no longer invest money in the bank to avoid triggering regulations that would come into play if its stake increased by around 10%.

On Friday, shares fell 8% to close at 1.86 francs ($2) on the Swiss stock exchange. The stock experienced a long downward slide: it traded at more than 80 francs in 2007.

Its current problems began after Credit Suisse announced on Tuesday that executives had identified “significant weaknesses” in the bank’s internal controls over financial reporting late last year. This stoked fears that Credit Suisse could be the next domino to fall.

Although smaller than its Swiss rival UBS, Credit Suisse still wields considerable influence, with $1.4 trillion in assets under management. The firm has major trading desks around the world, caters to the rich and the wealthy through its wealth management business, and is a leading M&A advisor to global companies. Notably, Credit Suisse did not need government assistance in 2008 during the financial crisis, unlike UBS.

Despite the banking turmoil, the European Central Bank on Thursday approved a steep half-percentage point hike in interest rates to try to rein in stubbornly high inflation, saying Europe’s banking sector is “resilient”, with strong finances.

ECB President Christine Lagarde said banks “are in a completely different position than they were in 2008” during the financial crisis, partly because of tighter government regulation.

The Swiss bank has been pushing to raise funds from investors and roll out a new strategy to overcome a series of problems, including bad bets on hedge funds, repeated changes in its management and a spy scandal involving UBS.