UBS acquires rival Credit Suisse for $3.2 billion

GENEVA –

Banking giant UBS is buying struggling rival Credit Suisse for nearly $3.25 billion, in a deal orchestrated by regulators to head off further market turmoil in the global banking system.

Swiss authorities have been pushing for UBS to take over its smaller rival after a plan by Credit Suisse to borrow up to 50 billion francs ($54 billion) failed to reassure investors and bank customers. Shares of Credit Suisse and other banks sold off this week after the failure of two banks in the United States raised concerns about other potentially fragile institutions in the global financial system.

Credit Suisse is among 30 financial institutions known as global systemically important banks, and authorities are concerned about the fallout in the event of bankruptcy.

The agreement was “of great magnitude for the stability of international finance”, Swiss President Alain Berset said when announcing the agreement on Sunday evening. “An uncontrolled collapse of Credit Suisse would have incalculable consequences for the country and the international financial system.”

The Swiss Federal Council, a governing body of seven members including Berset, passed an emergency ordinance allowing the merger to proceed without shareholder approval.

Credit Suisse Chairman Axel Lehmann called the deal a “watershed moment”.

“This is a historic, sad and very difficult day for Credit Suisse, for Switzerland and for the global financial markets,” said Lehmann, adding that the focus now is on the future and in particular on the 50 000 Credit Suisse employees, of which 17,000 are in Switzerland.

Colm Kelleher, the chairman of UBS, hailed the “enormous opportunities” emerging from the takeover and pointed to his bank’s “conservative risk culture” – a subtle swipe at a Credit Suisse culture that is known for its more capricious and aggressive bets on bigger returns. He said the combined group would create a wealth manager with more than $5 trillion in total invested assets.

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 brink to have a single national champion in banking.

The deal 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.

European Central Bank President Christine Lagarde hailed the “swift action” by Swiss officials, saying it was “instrumental in restoring orderly market conditions and ensuring financial stability”.

She said banks “are in a completely different position than they were in 2008” during the financial crisis, in part because of tighter government regulation.

As UBS buys Credit Suisse, UBS officials have said they plan to sell parts of it or downsize the bank in the months and years ahead.

The Swiss government is providing more than 100 billion francs in aid and financial support to bring the deal to fruition.

Part of the deal, about 16 billion francs ($17.3 billion) in Credit Suisse bonds will be wiped out. European banking regulators use a special type of bond designed to provide banks with a capital cushion in times of distress. But these bonds are designed to be wiped out if a bank’s capital falls below a certain level, which was triggered under this government-brokered deal.

Berset said the Federal Council had already discussed a long troubled situation at Credit Suisse since the start of the year and had held urgent meetings over the past four days amid growing concerns about its financial health which caused major slumps in its share price and raises the specter of the 2007-08 financial crisis.

We investors and banking analysts are still digesting the deal, but one analyst was soured by the news because of the reputational damage the deal could have on Switzerland’s global banking image.

“A nationwide reputation for careful financial management, strong regulatory oversight and, frankly, being somewhat austere and boring when it comes to investments, has been erased,” said Octavio Marenzi, CEO of consulting firm Opimas LLC, in an email.

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

Credit Suisse’s parent bank is not part of European Union supervision, but it does have entities in several European countries that are. Lagarde reiterated what she said last week after the central bank raised interest rates – that the European banking sector is resilient, with strong financial reserves and plenty of cash on hand.

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 Corp. 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 (US$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.

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.

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Associated Press writers Frank Jordans and Emily Schultheis in Berlin, Barbara Ortutay in Oakland, Calif., and Chris Rugaber in Washington contributed.