GENEVA — Banking giant UBS is buying its smaller rival Credit Suisse for $3.2 billion to avoid further market-shattering global banking turmoil, Swiss President Alain Berset announced Sunday night.
Berset called the announcement “one of great breadth for the stability of international finance. An uncontrolled collapse of Credit Suisse would have unforeseeable consequences for the country and the international financial system.”
The Swiss Federal Council, a seven-member governing body that includes Berset, has issued an emergency decree allowing the merger to proceed without shareholder approval.
Axel Lehmann, Chairman of the Board of Directors of Credit Suisse, called the deal “a clear turning point”.
“It is a historic, sad and very challenging 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 employees of Credit Suisse, 17,000 of them are in Switzerland.
UBS President Colm Kelleher hailed the “enormous opportunity” arising from the acquisition and stressed his bank’s “conservative risk culture” — a subtle jab at the culture at Credit Suisse, which is known for making bolder, riskier bets for higher returns . He said the combined group would create a wealth manager with over $5 trillion in total invested assets.
Berset said the council agreed to guarantee Credit Suisse liquidity totaling 150 billion francs (US$162 billion), well in excess of the 50 billion Swiss francs (US$54 billion) that had been publicly announced. But that didn’t seem to be enough.
“We have found that the liquidity outflows and volatility in the markets have shown that the necessary confidence can no longer be restored and that a quick solution that guarantees stability is essential.”
Federal Finance Minister Karin Keller-Sutter said the Council regrets “that the bank, which was once a model institute in Switzerland and part of our strong location, could ever find itself in this situation”.
The combination of the two largest and best-known Swiss banks, each with a turbulent history dating back to the mid-19th century, matches Switzerland’s reputation as a global financial center and comes close to a single national banking champion.
As UBS buys Credit Suisse, UBS officials said they plan to sell parts of Credit Suisse or reduce the bank’s size in the coming months and years.
The Swiss central bank has agreed to provide a 100 billion Swiss francs ($108 billion) loan backed by a federal default guarantee to support the transaction, which is expected to close by the end of the year.
Berset said the Bundesrat – Switzerland’s executive branch – had been discussing a long-trouble situation at Credit Suisse since the beginning of the year and has been holding urgent meetings over the past four days amid growing concerns about its financial health that have caused great impotence its share price and raised the specter of the 2007-2008 financial crisis.
Banking industry investors and analysts were still digesting the deal, but one analyst was upset with the news as the deal could have reputational damage to Switzerland’s image as a global banking hub.
“A nationwide reputation for prudent financial management, solid regulatory oversight, and, frankly, a somewhat dour and boring attitude towards investing has been snuffed out,” Octavio Marenzi, CEO of consulting firm Opimas LLC, said in an email.
Marenzi added he expects Switzerland’s direct-democratic model of government to be likely to lead to court cases and voting challenges to this deal, potentially leading to more chaos.
Credit Suisse is listed as one of the world’s global systemically important banks by the Financial Stability Board, an international body that oversees the global financial system. That means regulators believe its runaway failure would cause ripples across the financial system, much like the collapse of Lehman Brothers 15 years ago.
The deal follows last week’s collapse of two major US banks, which sparked a frantic, broad-based response from the US government to prevent further banking panics. Still, global financial markets have been on edge since Credit Suisse stock prices began falling 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 prompted major bailouts from the Federal Deposit Insurance Corporation and the Federal Reserve. As a result, their demise doesn’t necessarily signal the start of a financial crisis, much like it did in 2008.
The deal caps a highly volatile week for Credit Suisse, particularly on Wednesday when its shares fell to a record low after its biggest investor, the Saudi National Bank, announced it would stop investing money in the bank to avoid getting involved would if its stake increased by about 10%.
Shares fell 8% on Friday to close at 1.86 francs ($2) on the Swiss stock exchange. The share has come a long way: in 2007 it was listed at over 80 francs.
The current troubles began after Credit Suisse reported on Tuesday that managers identified “material weaknesses” in the bank’s internal controls over financial reporting late last year. That fueled fears that Credit Suisse could be the next domino to fall.
Smaller than its Swiss rival UBS, Credit Suisse still wields significant influence with $1.4 trillion in assets under management. The firm has major trading offices around the world, serves the rich and affluent through its wealth management business and is a key advisor to global companies on mergers and acquisitions. Notably, Credit Suisse did not require government support during the 2008 financial crisis, while UBS did.
Despite the banking turmoil, the European Central Bank on Thursday approved a big half-a-point rate hike to try to stem stubbornly high inflation, saying Europe’s banking sector was “resilient” and had strong finances.
ECB President Christine Lagarde said banks were “in a completely different position to 2008” during the financial crisis, partly because of tighter government regulation.
The Swiss bank has been pushing to raise money from investors and launch a new strategy to overcome a series of problems including bad bets on hedge funds, repeated top management reshuffles and a spy scandal involving UBS.
Copyright © 2023 The Washington Times, LLC.
Source : www.washingtontimes.com