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UBS buys Credit Suisse to stop the banking crisis

LONDON (CNN) Switzerland’s largest bank, UBS, has agreed to buy its ailing rival Credit Suisse as part of an emergency bailout deal aimed at stemming the financial market panic triggered by the collapse of two American banks earlier this month.

“UBS today announced the acquisition of Credit Suisse,” the Swiss National Bank said in a statement. The rescue would “ensure financial stability and protect the Swiss economy,” it said.

UBS is paying 3 billion Swiss francs ($3.25 billion) for Credit Suisse, about 60% less than the bank was worth when markets closed on Friday. Credit Suisse shareholders will be largely wiped out, receiving the equivalent of just 0.76 Swiss francs in UBS shares for shares valued at 1.86 Swiss francs on Friday.

Extraordinarily, the transaction does not require shareholder approval after the Swiss government agreed to amend the law to remove any uncertainty about the transaction.

Swiss credit (CS) had lost the trust of investors and customers for years. In 2022, it recorded its worst loss since the global financial crisis. But confidence collapsed last week after acknowledging “material weakness” in its accounting and as the demise of Silicon Valley Bank and Signature Bank spread fears of weaker institutions at a time when rising interest rates are eroding the value of some financial assets have undermined.

Shares of the 167-year-old bank fell 25% for the week, money spilled out of mutual funds it manages and at one point accountholders withdrew deposits by more than $10 billion a day, the Financial Times reported. A nearly $54 billion emergency loan from the Swiss National Bank failed to stop the bleeding.

But it had “built a bridge” to the weekend so the rescue could be stitched together, Swiss officials said Sunday night.

“This acquisition is attractive to UBS shareholders, but let’s be clear this is an emergency rescue for Credit Suisse,” UBS President Colm Kelleher told reporters.

“It is absolutely necessary for the financial structure of Switzerland and … for the global financial community,” he told reporters.

To prevent Monday’s meltdown from spreading to the global financial system, Swiss authorities, with limited government support, have sought a private-sector solution while reportedly considering Plan B – full or partial nationalization.

“Given the recent extraordinary and unprecedented circumstances, the announced merger represents the best available outcome,” said Axel Lehmann, Chairman of Credit Suisse, in a statement.

“This has been an extremely challenging time for Credit Suisse and while the team has worked tirelessly to address many important legacy issues and implement its new strategy, today we are compelled to find a solution that will deliver a lasting outcome.”

The emergency takeover was agreed after days of hectic negotiations between financial regulators in Switzerland, the United States and the United Kingdom. UBS (UBS) and Credit Suisse are among the top 30 banks in the global financial system and together have nearly $1.7 trillion in assets.

Regulators welcome the acquisition

Financial market regulators around the world hailed UBS’s acquisition of Credit Suisse.

US authorities said they supported the action and were working closely with the Swiss central bank to support the takeover.

“We welcome today’s announcements by the Swiss authorities to support financial stability,” US Treasury Secretary Janet Yellen and Federal Reserve Chair Jerome Powell said in a joint statement. “The US banking system’s capital and liquidity positions are strong and the US financial system is resilient.”

Christine Lagarde, President of the European Central Bank, said the banking sector remains resilient but the ECB stands ready to help banks have enough cash to fund their operations should the need arise.

“I welcome the quick action and decisions taken by the Swiss authorities,” said Lagarde. “They are crucial to restoring orderly market conditions and ensuring financial stability.

The Bank of England said it welcomed the measures taken by Swiss authorities “to support financial stability”.

“We have worked closely with international colleagues during the preparations for today’s announcements and will continue to support their implementation,” it said in a statement. “The UK banking system is well capitalized and funded and remains safe and sound.”

How UBS and Credit Suisse fit together

The global headquarters of UBS and Credit Suisse are just 300 meters apart in Zurich, but the banks’ fortunes have been on very different paths lately. UBS shares are up 15% over the past two years, posting a profit of $7.6 billion in 2022. It was valued at about $65 billion as of Friday, according to Refinitiv.

Credit Suisse shares have lost 84% of their value over the same period, posting a loss of $7.9 billion over the past year. It was worth just $8 billion late last week.

UBS CEO Ralph Hamers will lead the newly merged giant bank.

Credit Suisse dates back to 1856 and has its roots in the Schweizerische Kreditanstalt (SKA), which was founded to finance the expansion of the railway network and the industrialization of Switzerland.

Not only is it the second largest bank in Switzerland, it also manages the wealth of many of the world’s richest people and provides global investment banking services. At the end of 2022, it employed over 50,000 people, 17,000 of them in Switzerland.

The Swiss National Bank announced it would provide a 100 billion Swiss francs ($108 billion) loan to UBS and Credit Suisse to boost liquidity.

UBS CEO Ralph Hamers will become CEO of the combined bank and Kelleher will serve as chairman.

The acquisition will strengthen UBS’s position as the world’s leading wealth manager with $5 trillion in assets under management and strengthen its ambitions to grow in the Americas and Asia. UBS expects cost savings of $8 billion a year by 2027. The Credit Suisse investment bank is in the crosshairs.

“To be clear, UBS intends to downsize Credit Suisse’s investment banking business and align it with our conservative risk culture,” Kelleher said.

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