UBS acquires Credit Suisse for $3.5 billion

20 Mar 2023 , 08:30 AM

In an effort to prevent future market-shaking turbulence in the global banking system, banking behemoth UBS is purchasing ailing rival Credit Suisse for about $3.25 billion.

After a plan for Credit Suisse to borrow up to 50 billion francs ($54 billion) failed to satisfy investors and the bank’s clients, Swiss authorities pushed for UBS to acquire its smaller rival. Shares of Credit Suisse and other banks fell this week as a result of worries about more potentially unstable institutions in the global financial system raised by the bankruptcy of two U.S. banks.

One of the 30 financial organizations considered to be globally systemically significant banks is Credit Suisse, and regulators are concerned about the repercussions if it were to fail.

For the stability of global finance, the transaction was ‘one of immense width, ‘Alain Berset, the president of Switzerland, made the announcement on Sunday night. ‘Unimaginable repercussions for the nation and the global financial system would result from an unchecked collapse of Credit Suisse.

Switzerland’s executive branch, a seven-member governing body that includes Berset, enacted an emergency ordinance allowing the merger to go through without shareholder approval.

Axel Lehmann, chairman of Credit Suisse, described the sale as ‘a decisive turning point.’

The world’s central banks planned coordinated financial actions to stabilize banks in the upcoming week in response to news of the Swiss agreement. For banks wishing to borrow dollars on a daily basis, a facility that was heavily used during the 2008 financial crisis, is also included. Such swap lines have been used to borrow $580 billion three months after Lehman Brothers failed in September 2008. Moreover, additional swap lines were launched amid market turbulence at the start of the COVID-19 pandemic in March 2020.

The chairman of UBS, Colm Kelleher, praised the ‘enormous prospects’ that result from the acquisition and emphasized his bank’s ‘conservative risk culture’ in a subtly critical reference to Credit Suisse’s reputation for taking more daring, risky bets in an effort to increase profits. He claimed that the combined organization would produce a wealth manager with invested assets totaling more than $5 trillion.

The council ‘regrets that the bank, which was once a model institution in Switzerland and part of our strong location, was able to get into this condition at all,’ according to Swiss Finance Minister Karin Keller-Sutter.

The merger of the two largest and most well-known Swiss banks, each with illustrious histories going back to the middle of the 19th century, amounts to a thunderclap for Switzerland’s status as a major international financial hub, putting the country on the verge of having a single national banking champion.

Although the parent bank of Credit Suisse is not subject to European Union oversight, certain of its subsidiaries in various European nations are. Lagarde reaffirmed what she said the week before after the central bank increased interest rates, stating that the European banking industry is resilient and has a lot of available cash as well as significant financial reserves.

The vulnerabilities that led to the loss of Silicon Valley Bank and Signature Bank, whose failures necessitated a large rescue effort by the Federal Deposit Insurance Corp. and the Federal Reserve, are not shared by many of Credit Suisse’s issues. Hence, their failure does not inevitably portend the beginning of a financial crisis like the one that occurred in 2008.

With $1.4 trillion in assets under management, Credit Suisse still has significant influence despite being smaller than its Swiss rival UBS. The company serves the rich and famous through its wealth management division, has big trading desks around the world, and is a key advisor for multinational corporations in mergers and acquisitions. It is noteworthy that whereas UBS required government help in 2008 during the financial crisis, Credit Suisse did not.

The Swiss bank has been attempting to acquire money from investors and implement a new strategy to get out from under a number of difficulties, including failed hedge fund bets, recurrent management changes, and a UBS spying scandal.

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