UBS To Acquire Credit Suisse for $3.25 Billion, As Regulators Step In Amidst Growing Global Financial Concerns

Union Bank of Switzerland has been urged by Swiss authorities to acquire its smaller competitor, Credit Suisse, following the latter's unsuccessful attempt to borrow up to 50 billion francs ($54 billion) amidst investor and customer skepticism.

The failure of two US banks recently resulted in plummeting share prices of Credit Suisse and other banks, thereby raising concerns about possible instability among other institutions worldwide.

Credit Suisse is one of 30 globally important banks; authorities fear its failure could have a significant impact.

Swiss President Alain Berset declared the recent deal as crucial for international finance stability. He highlighted that a potential uncontrolled fall of Credit Suisse would harm both the Swiss nation and the global financial sector.

Switzerland's executive body, consisting of seven members including Berset, passed a decree permitting the merger without shareholders' consent.

The announcement of the Swiss deal prompted global central banks to announce a coordinated effort to maintain financial stability for banks in the upcoming week.

Among the measures is the provision of daily access to a lending facility for banks in need of borrowing US dollars, a practice that was extensively used during the 2008 financial crisis.

To put things in perspective, three months after Lehman Brothers' collapse in 2008, swap lines worth $580 billion were utilised. Additional swap lines were introduced in response to the COVID-19 pandemic in March 2020 amid market turmoil.

UBS Chairman Colm Kelleher praised the vast potential of the acquisition and emphasized his bank's cautious risk-taking approach that differs from Credit Suisse's more daring style.

He also noted that the merger will lead to the creation of a wealth management entity with invested assets totaling more than $5 trillion.

Swiss Finance Minister Keller-Sutter expressed regret that the bank, once a model institution in Switzerland, was in this situation at all.

The merging of Switzerland's two largest and renowned banks, with histories dating back to the mid-1800s, is a major blow to its reputation as a global financial hub.

It leaves Switzerland on the verge of having one dominant national banking champion.

Around $17.3 billion in Credit Suisse bonds will be scrapped under the agreement. European banking authorities use specific bonds that serve as a shield for banks during turbulent times.

Nonetheless, if a bank's capital dips below a specific limit, these bonds are intended to be eliminated, which happened during this negotiated arrangement.

The Federal Council has been addressing Credit Suisse's ongoing problems since the start of the year. However, in the last few days, they held urgent meetings as worries about the bank's financial health increased.

The situation resulted in a significant drop in the stock price and raised concerns about the 2007-2008 financial crisis.

Credit Suisse is among the world's significant banks, designated by the Financial Stability Board that supervises the global financial system.

In case of uncontrolled failure, regulators predict its impact to be similar to Lehman Brothers' downfall, leading to ripples throughout the financial system.

Credit Suisse's parent bank is not subject to EU supervision, but it has European entities that are. In light of recent interest rate increases, European Central Bank President Christine Lagarde emphasized that the banking sector is robust, with ample financial reserves and liquidity.

Credit Suisse faces distinctive challenges that differ from those which caused the financial collapse of Silicon Valley Bank and Signature Bank.

Consequently, the well-being of Credit Suisse doesn't signify the emergence of another 2008-like financial crisis, which necessitated substantial monetary support from the Federal Deposit Insurance Corp. and Federal Reserve.

Credit Suisse's problems started when it was revealed on Tuesday (14 March) that there were "material weaknesses" in the bank's internal controls on financial reporting as of the end of last year.

This news caused concerns that Credit Suisse would be the next bank to face issues in the industry.

Credit Suisse manages around $1.4 trillion in assets, making it smaller than Swiss-based rival UBS. However, the company still plays a significant role in the financial industry.

It has global trading desks, providing wealth management services to affluent individuals, and advising major corporations on mergers and acquisitions. Unlike UBS, Credit Suisse did not require government support during the 2008 financial crisis.

UBS, the Swiss bank, aims to raise funds and implement a new strategy to combat various issues such as hedge fund losses, frequent management changes, and a spying controversy.