Geneva – Shares of Credit Suisse fell 63% in early trade Monday after it was announced that banking giant UBS would buy its troubled rival for nearly $3.25 billion in a deal orchestrated by regulators to stave off further market-shaking turmoil in the global banking system.
Shares of UBS fell 14% in early trade on the Swiss stock exchange.
Swiss authorities urged UBS to take over its smaller rival after a Credit Suisse plan to borrow up to 50 billion francs ($54 billion) failed to reassure investors and the bank’s clients. Shares in Credit Suisse and other banks fell after two US banks failed, raising questions about potentially shaky other global financial institutions.
Credit Suisse is among the 30 financial institutions known to be systemically important banks globally, and authorities worry about the repercussions if it fails.
In announcing Sunday evening, Swiss President Alain Berset said the deal was a “major deal for the stability of international finance”. “The disorderly collapse of Credit Suisse will lead to incalculable consequences for the country and the international financial system.”
Switzerland’s executive branch, a seven-member governing body that includes Berset, passed an emergency law allowing mergers without shareholder approval.
Markets remain jittery despite regulators’ best efforts to restore calm. Global stock markets sank on Monday, with Hong Kong’s main index down more than 3%. Market indices in Frankfurt and Paris opened down more than 1%. Shanghai, Tokyo and Sydney also fell behind. Wall Street futures fell 1%. Oil prices fell by more than $2 a barrel.
Credit Suisse Chairman Axel Lehmann described the sale to UBS as “a clear turning point”.
“It is a very sad and difficult historic day for Credit Suisse, for Switzerland and for global financial markets,” Lehmann said, adding that the focus was now on the future and on Credit Suisse’s 50,000 employees, 17,000 in Switzerland.
After news of the Swiss deal, the world’s central banks announced concerted steps to stabilize banks, including access to lending facilities for banks to borrow US dollars if they needed them, a practice widely used during the 2008 crisis. Lehman Brothers In September of 2008, these interchange lines were exploited for $580 billion. Barter lines were also introduced during the market turmoil in the early stages of the COVID-19 pandemic.
“Today is one of the most important days for European banking since 2008, with far-reaching implications for the industry,” said Max Georgiou, analyst at Thirdbridge. “These events could change the course of not only European banking but the wealth management industry in general.”
Colm Kelleher, chairman of UBS, hailed the “enormous opportunities” from the acquisition and highlighted his bank’s “risk-taking conservative culture” – a subtle criticism of Credit Suisse’s reputation for gambling jaunts in search of bigger returns. He said the combined group would create a wealth manager with more than $5 trillion in total invested assets.
UBS officials said they plan to sell parts of Credit Suisse or downsize the bank.
Swiss Finance Minister Karin Keller-Sutter said the board “regrets that the bank, once an exemplary institution in Switzerland and part of our strong position, was ever able to enter into this situation.”
The combination of the two largest and best-known Swiss banks, each with a long history dating back to the mid-19th century, amounts to a thunderclap to Switzerland’s reputation as a global financial center – putting it on the cusp of having one national banking champion. .
The deal comes on the heels of the collapse of two major US banks last week which sparked a frantic and widespread response from the US government to prevent further panic.
European Central Bank President Christine Lagarde praised the “swift action” by Swiss officials, saying they were “instrumental in restoring orderly market conditions and ensuring financial stability.”
She emphasized that the European banking sector is resilient, with strong financial reserves and an abundance of ready cash. She said banks were “in a very different position than in 2008” during the financial crisis, in part because of tougher government regulation.
The Swiss government is providing more than 100 billion francs to support the takeover.
As part of the deal, nearly 16 billion francs ($17.3 billion) of Credit Suisse bonds will be liquidated. European bank regulators use a special type of bond designed to provide a capital cushion to banks in times of trouble. The bonds were designed to be wiped out if the bank’s capital fell below a certain level, which was due to a government-brokered deal.
This raised market concerns about those bonds and other banks holding them.
Berset said the Federal Council had been discussing the problems of Credit Suisse since early this year and held urgent meetings last week.
Investors and banking industry analysts were still digesting the deal, but at least one analyst suggested the deal could tarnish Switzerland’s global banking image.
“A nation-wide reputation with prudent financial management, sound regulatory oversight and, frankly, for being a little bit tough and boring about investments, has been wiped out,” Octavio Marenzi, CEO of consulting firm Opimas LLC, said in an email.
The Financial Stability Board, an international body that monitors the global financial system, has rated Credit Suisse as one of the world’s most important banks, meaning regulators fear a meltdown could spread throughout the financial system like that of Lehman Brothers 15 years ago.
The main bank, Credit Suisse, is not part of the EU supervision, but has entities in several European countries.
Credit Suisse’s problems resurfaced after it reported that directors had identified “material weaknesses” in its internal controls over financial reporting. That sparked fears that it would be the next domino to fall. Many of its problems are unique and unlike the vulnerabilities that brought down Silicon Valley Bank and Signature Bank. Their failure led to a major bailout effort by the Federal Deposit Insurance Corporation and the Federal Reserve to prevent a crisis similar to that of 2008.
Shares of Credit Suisse fell to a record low on Wednesday after the biggest investor, Saudi National Bank, said it would not invest any more money in the bank to avoid tripping over regulations that would kick in if its stake rose by about 10%.
On Friday, its shares fell 8% to close at 1.86 francs ($2) on the Swiss Stock Exchange. The stock experienced a long downward spiral: it traded at more than 80 francs in 2007.
UBS is bigger, but Credit Suisse is still very influential, with $1.4 trillion in assets under management. It has important business offices around the world, caters to the wealthy through its wealth management business, and is a lead advisor for mergers and acquisitions. The bank survived the 2008 financial crisis without help, unlike UBS.
Credit Suisse is seeking to raise money from investors and put forward a new strategy to overcome a host of problems, including bad bets on hedge funds, frequent tremors in its senior management and the spying scandal involving UBS.
