The announcement that UBS would buy Credit Suisse for almost $3.25 billion in a deal orchestrated by regulators to stave off further market-shaking turmoil in the global banking system has sent shares of Credit Suisse plunging by 60.5% in early trading on Monday. UBS shares also dropped by 8% on the Swiss stock exchange. Swiss authorities had urged UBS to take over its smaller rival after a plan for Credit Suisse to borrow up to 50 billion francs ($54 billion) failed to reassure investors and the bank’s customers. The failure of two banks in the U.S. last week had already raised questions about other potentially weak global financial institutions, causing shares of Credit Suisse and other banks to plummet.
The Rationale for the UBS-Credit Suisse Deal
The Swiss authorities were worried about the fallout if Credit Suisse were to fail. An uncontrolled collapse of Credit Suisse could have incalculable consequences for the country and the international financial system, according to Swiss President Alain Berset, who announced the deal Sunday night. UBS is bigger, but Credit Suisse wields considerable influence, with $1.4 trillion assets under management. It has significant trading desks around the world, caters to the rich through its wealth management business, and is a major mergers and acquisitions advisor. The bank did weather the 2008 financial crisis without assistance, unlike UBS.
Credit Suisse’s Recent Troubles
Many of Credit Suisse’s current problems are unique and unlike the weaknesses that brought down Silicon Valley Bank and Signature Bank in the U.S. The bank has faced an array of troubles in recent years, including bad bets on hedge funds, repeated shake-ups of its top management, and a spying scandal involving UBS. Those troubles resurfaced last week after it reported managers had identified “material weaknesses” in its internal controls on financial reporting. Shares plunged Wednesday after its largest investor, the Saudi National Bank, said it wouldn’t invest any more money in the bank to avoid triggering regulations that would kick in if its stake rose about 10%.
Switzerland’s executive branch passed an emergency ordinance allowing the merger to go through without shareholder approval. As part of the deal, approximately 16 billion francs ($17.3 billion) in Credit Suisse bonds will be wiped out. That has triggered concern about the market for those bonds and for other banks that hold them.
Impact on the Global Banking System
The combination of the two biggest and best-known Swiss banks, each with storied histories dating to the mid-19th century, amounts to a thunderclap for Switzerland’s reputation as a global financial center, putting it on the cusp of having a single national banking champion. The deal follows the collapse of two large U.S. banks last week that spurred a frantic, broad response from the U.S. government to prevent further panic.
In conclusion, UBS’s decision to acquire Credit Suisse for $3.25 billion is a move aimed at avoiding further market-shaking turmoil in the global banking system. It came after a plan for Credit Suisse to borrow up to 50 billion francs ($54 billion) failed to reassure investors and the bank’s customers. The deal allows UBS to acquire a rival bank with considerable influence and a significant presence around the world.