UBS acquires rival Credit Suisse

GENEVA –

Banking giant UBS is buying its smaller rival Credit Suisse for $3.2 billion to avoid further turbulence in the global banking market, Swiss President Alain Berset announced on Sunday evening.

Berset called the announcement “of great significance 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 Federal Council, a seven-member governing body including Berset, passed an emergency ordinance that allows the merger to proceed without shareholder approval.

Credit Suisse Chairman Axel Lehmann called the deal a “clear turning point”.

“It 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 is now 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 jab at a Credit Suisse culture known for its more capricious and riskier bets on higher returns. He said the combined group would create a wealth manager with more than $5 trillion in total invested assets.

Berset said the board had agreed to guarantee a total of 150 billion Swiss francs ($162 billion) of liquidity to Credit Suisse, well above the 50 billion Swiss francs ($54 billion) figure 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 brink to have a single national bank champion of the bank.

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

The Swiss central bank has agreed to provide a 100 billion Swiss franc ($108 billion) loan backed by a federal default guarantee to back the deal, which is expected to close by the end of the year.

Berset said the Federal Council – the Swiss executive – 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 over its financial health which caused significant wanes in its stock price and raised the specter of the financial crisis of 2007-2008.

Investors and banking industry analysts were still digesting the deal, but one analyst was embittered by the news because of the reputational damage the deal could have on Switzerland’s image as a global banking center.

“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.

Marenzi added that he expected Switzerland’s direct-democratic government model to lead to legal and electoral challenges to the deal, which could lead to more chaos.

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.

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.

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 significant 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.

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