UBS will take over Credit Suisse in a deal to stem what was quickly becoming a global crisis of confidence.
Credit Suisse, the beleaguered 167-year-old lender, was brought to the brink of financial calamity last week, despite secure $54bn (£44bn) credit line of the Swiss central bank.
The credit line was agreed in a bid to reassure markets and depositors, but it failed to stem a rush to withdraw clients, prompting the Swiss government to ask rival UBS to consider a takeover.
The takeover was announced on Sunday evening – UBS will pay 3 billion Swiss francs (£2.6 billion) to acquire Credit Suisse, it has agreed to take on up to 5 billion Swiss francs (4.4 billion pounds) of losses and 100 billion Swiss francs (£88.5 billion) of cash will be made available to the two banks.
The deal is expected to be completed by the end of this year.
Colm Kelleher, UBS Group Chairman, said the deal “represents huge opportunities”.
He also said his bank’s long-term goal would be to scale back Credit Suisse’s investment banking business and bring it into line with UBS’s “conservative risk culture”.
Axel Lehmann, chairman of Credit Suisse, described the day as “historic, sad and very difficult” for his bank and the global market.
“The best result available”
Mr. Lehmann said, “Given the recent extraordinary and unprecedented circumstances, the announced merger represents the best outcome available.
“It has been an extremely difficult time for Credit Suisse and although the team has worked tirelessly to resolve many legacy issues and execute its new strategy, we are compelled today to find a solution that delivers results. sustainable.”
In a statement, the Swiss central bank and other officials said the deal represented “a solution…to ensure financial stability and protect the Swiss economy in this exceptional situation.”
It is also hoped that UBS’ takeover of its former rival will prevent contagion of the kind seen during the 2008 financial crisis.
This is an important deal, but huge risks continue to loom over the global financial system
This combination brings together not only the two largest Swiss banks, but also two of the most important financial institutions in the world.
During the press conference, reference was made to discussions with Jeremy Hunt, the British Chancellor.
This underscores the crucial nature of this deal as governments and financial regulators around the world race to contain the biggest banking sector crisis in 15 years.
It was still an agreement that the Swiss government had resisted. It had been speculated so many times over the past decade, but the Swiss government had always wanted to retain two national banking champions.
But let’s be clear, all parties involved in this deal have indeed been heavily armed by the crisis of confidence that has erupted at Credit Suisse, and which has been fomenting for some time.
UBS was indeed heavily armed to enter into this deal by the Swiss government, and Credit Suisse was forced to accept it – there will be no shareholder vote on the transaction.
The only alternative to this agreement was going to be when the financial markets opened on Monday in Asia and then in Europe, a form of nationalization or resolution of Credit Suisse which would have aggravated the feeling of crisis in the sector.
This government-orchestrated bailout averts the collapse of a major global bank, but while it may be tempting to believe that this is drawing a line under this banking crisis, remember that a week ago HSBC stepped in to buy the UK arm of Silicon Valley Bank for £1 after its US parent company collapsed, and a number of other mid-sized US banks have been forced to seek emergency relief over the past 10 years days.
All of this reminds us that, while interest rates are likely to struggle against global inflationary pressures, enormous risks continue to hang over the global financial system.
Central banks insist on the resilience of systems
The news was welcomed by central banks in the US, Europe and the UK.
All three insisted that the banking systems under their jurisdiction are strong and resilient.
The Bank of England said: “We have worked closely with our international counterparts throughout the preparations for today’s announcements and will continue to support their implementation.
“The UK banking system is well capitalized and funded, and remains safe and sound.”
An agreement likely to reverberate on world markets
Credit Suisse is one of the world’s largest wealth managers and is also among 30 banks classified as systemically important, meaning the deal is expected to trickle down to global markets on Monday.
It is also one of the largest investment banking employers in the City of London, employing around 5,000 people.
In a memo to employees on Sunday, Credit Suisse said there would be no immediate impact to customers or day-to-day work operations, adding that branches and global offices would remain open.
It comes after a few difficult weeks for the banking sector, with the collapse of US lenders Silicon Valley Bank and Signature Bank.
The British branch of SVB was saved by HSBC for £1but a number of other midsize US lenders were also forced to seek emergency funding.