UBS signed a deal to purchase its ailing competitor Credit Suisse for 3 billion Swiss francs ($3.2 billion) on Sunday.
With Swiss regulators playing a crucial role in the agreement, governments attempted to halt the spread of a contagion that threatened the global banking system.
UBS’ Takeover Of Credit Suisse
In this exceptional situation, a solution has been found to ensure financial stability and protect the Swiss economy, according to a statement from the Swiss National Bank, which also noted that the central bank collaborated with the Swiss government and the Swiss Financial Market Supervisory Authority to bring about the merger of the country’s two largest banks.
According to the terms of the transaction, Credit Suisse shareholders would get one UBS share for every 22.48 Credit Suisse shares they own.
This transaction is good for UBS shareholders, but let’s be clear: for Credit Suisse, this is a life-or-death situation. “We have designed a transaction that would retain the remaining business value while minimizing our downside exposure”, Colm Kelleher, chairman of UBS, said in a statement.
UBS estimates that the combined bank will have $5 trillion in investment assets.
To facilitate the acquisition, the Swiss National Bank committed a loan of up to 108 billion Swiss francs (100 billion Swiss francs). According to a second government announcement, the Swiss government also offered a guarantee to assume losses of up to 9 billion Swiss francs from specific assets above a certain threshold to minimize potential risks for UBS.
Credit Suisse Statement
In an effort to stem the decline and restore confidence in the bank, the Swiss central bank issued a new loan of up to 50 billion Swiss francs ($54 billion) last week.
Credit Suisse has already endured a run of losses and controversies, and in the previous two weeks, the collapse of Silicon Valley Bank and Signature Bank in the United States shook investor sentiment once again.
The failure of U.S. regulators to protect uninsured deposits in collapsed banks and the introduction of a new funding facility for weak financial institutions have failed to halt the shock and threaten to engulf further banks in the U.S. and abroad.
Axel Lehmann, chairman of Credit Suisse, stated in a news conference that the financial instability caused by the failure of regional banks in the United States hit the bank at the wrong time.
Credit Suisse’s size and potential impact on the global economy are significantly larger than those of U.S. regional banks, which prompted Swiss regulators to find a means to merge the nation’s two largest financial firms.
As of the end of 2022, Credit Suisse’s balance sheet is over double the size of Lehman Brothers at the time of its demise, at approximately 530 billion Swiss francs. It is also much more globally networked, with several overseas subsidiaries, which makes Credit Suisse’s situation management much more crucial.
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Banking System Issues
In the end, though, the pressure to avert a systemic disaster prevailed. Sunday, UBS reportedly made an initial offer to acquire Credit Suisse for approximately $1 billion, according to several media reports.
Credit Suisse reportedly rejected the offer, citing that it was too low and would harm shareholders and employees, according to Bloomberg sources.
Credit Suisse lost approximately 38% of its deposits in the fourth quarter of 2022 and disclosed early last week in its late annual report that outflows have failed to stop. It recorded a net loss of 7,3 billion Swiss francs for the entire year of 2022 and anticipates another substantial loss in 2023.
In an effort to address these persistent challenges, the bank had already announced a substantial strategic change, with current CEO and Credit Suisse veteran Ulrich Koerner taking over in July.
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