UBS acquires Credit Suisse: a new era begins

UBS acquires Credit Suisse with Federal Council approval granting a guarantee for additional liquidity support to Credit Suisse from the Swiss National Bank (SNB). The move opens a new era for the banking sector and the entire financial center.

Credit Suisse is a Zurich, Switzerland-based bank founded in 1856 by Alfred Escher operating globally through three divisions (Private Banking, Investment Banking, Asset Management).

After several scandals, the exposure in the failed Archegos and Greensil funds in 2021, the group experienced huge losses and has not recovered. Last November S&P downgraded the rating to Bbb-.

On Sunday, March 19, 2023 after long negotiations came the deal: Ubs buys Credit Suisse for 3 billion Swiss francs in shares. The Federal Council approves this decision and considers it an important contribution to the stability of the financial market. In order to ensure the continuation of Credit Suisse’s operations until the implementation of the acquisition and to reduce costs for the Swiss economy, the Executive decided on additional liquidity measures:

• as a first measure, the Federal Council created the necessary legal basis for the SNB to grant Credit Suisse additional liquidity supports. Concretely, for these supports the Executive introduced a privilege in bankruptcy. This gives the SNB the security it needs to be able to make this substantial additional liquidity available to Credit Suisse should the need arise;
• in order to guarantee Credit Suisse sufficient liquidity at all times, as a second measure the Federal Council decided to grant the SNB a guarantee in the event of failure. Both measures are governed by Articles 184 and 185 of the Federal Constitution (right of necessity).

These measures complement the instruments already available to the SNB to strengthen the liquidity of banks, which include in particular the ordinary liquidity support provided in emergency situations (ELA, “Emergency Liquidity Assistance”).

The Federal Council believes that such measures are the most appropriate way to increase market confidence in Credit Suisse and the Swiss financial center. Similar instruments exist in the United States, the EU and the United Kingdom.

In order to reduce possible risks to UBS, the federal government is granting UBS a guarantee in the order of 9 billion francs to assume potential losses from certain assets that UBS would take back as part of the transaction, should these potential losses exceed a certain threshold.

The Executive asked the Finance Delegation of the Federal Chambers for an urgent commitment credit approved on Sunday, March 19, 2023.

The decided measures ensure that the SNB can make sufficient liquidity available to Credit Suisse if needed. Obtaining liquidity support is subject to strict conditions. In addition, according to Article 10a of the Banking Act, the Federal Council will also order measures concerning remuneration.

The Executive has taken measures to contain the risks to the federal government as much as possible. Therefore, Credit Suisse will have to pay a risk premium to both the federal government and the SNB. It will also have to pay a premium for the provision of collateral in the event of default to the federal government and interest to the SNB. From these measures and the privilege in bankruptcy, there is little risk of dissolution for the federal government.

The SNB’s existing and new liquidity supports are sufficient, together with the liquidity reserves available to Credit Suisse, to ensure sufficient liquidity for the institution. With this set of measures, the Federal Council reaffirms its willingness to take the necessary steps to protect depositors and the stability of the Swiss financial center.

A not entirely painless transition

Ubs’ rescue of Credit Suisse does not seem to convince European markets: investors’ fear is that there will be a domino effect involving other banks.

The UBS buyout incorporates a massive write-down of Credit Suisse shares in the range of 60 percent. In the morning of Monday, March 20, the Swiss bank’s shares, which closed at 1.86 francs a share on Friday, worth about 28 billion, reached 0.75 francs and a value of about 16 billion Swiss francs.

According to BAK Economics, the acquisition of Credit Suisse by UBS avoids serious damage to the Swiss economy, and the negative effects remain largely limited to the banking sector. The rationalization potential of the two banks is around 9,500 to 12,000 jobs. The deal, according to BAK Economics, will have limited effects on Switzerland’s GDP, which is still expected to grow by 0.7 percent this year and 1.6 percent in 2024.

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The new UBS

UBS was created in 1998 through the merger of Union of Swiss Banks and Swiss Bank Corporation, but the official founding date goes back to 1862, when the Bank of Winterthur, was founded and has its roots in as many as 370 separate financial institutions that have followed over the years. Two years after the merger, in 2000, UBS acquired the U.S.-based Paine Webber Group, transforming it into the world’s largest private bank.

The acquisition of Credit Suisse will strengthen UBS’s position as the world’s largest wealth manager, with $5 trillion in invested assets, and enhance its growth ambitions in the Americas and Asia by opening a new era.