UBS acquiring smaller rival Credit Suisse

GENEVA –

Banking giant UBS is buying smaller rival Credit Suisse for $3.2 billion in a bid to avoid further market turmoil in the global banking sector, Swiss President Alain Berset said on Sunday evening.

Berset called the statement “great latitude for the stability of international finance. The uncontrollable collapse of Credit Suisse will have incalculable consequences for the country and the international financial system.”

The Swiss Federal Council, the seven-member governing body that includes Berset, passed an emergency resolution allowing the merger to go ahead without shareholder approval.

Credit Suisse chairman Axel Lehmann called the deal “a clear turning point.”

“This is a historic, sad and very difficult day for Credit Suisse, Switzerland and the global financial markets,” Lehmann said, adding that the focus was now on the future and in particular Credit Suisse’s 50,000 employees, of which 17,000. are located in Switzerland.

UBS chairman Colm Kelleher hailed the “tremendous opportunities” arising from the takeover and highlighted his bank’s “conservative risk culture”. . He said the combined group would create a wealth manager with more than $5 trillion in total invested assets.

Berset said the board had agreed to guarantee Credit Suisse a total of 150 billion francs ($162 billion) in liquidity, far more than the 50 billion Swiss francs ($54 billion) it had publicly announced. But that wasn’t enough.

“We noted that the outflow of liquidity and the volatility of the markets showed that the necessary confidence can no longer be restored, and a quick solution to guarantee stability is essential.

Swiss Finance Minister Karin Keller-Sutter said the board “regrets that a bank that was once a model Swiss institution and part of our strong position could end up in this situation at all.”

The combination of two of Switzerland’s largest and best-known banks, each with a storied history dating back to the mid-19th century, is a thunderbolt for Switzerland’s reputation as a global financial center, leaving it at the pinnacle of a single nation. champion in the banking sector.

While UBS is buying Credit Suisse, UBS officials said they plan to sell parts of Credit Suisse or downsize the bank in the coming months and years.

The Swiss central bank has agreed to provide a 100 billion Swiss franc ($108 billion) loan with a federal default guarantee to back the deal, which is expected to be completed by the end of the year.

Berset said the Federal Council, Switzerland’s executive branch, had already discussed Credit Suisse’s long-troubled situation since the start of the year and had held emergency meetings over the past four days amid worries about its financial health that have become a major cause. reduced its stock price and raised the specter of the 2007-2008 financial crisis.

Investors and banking analysts were still digesting the deal, but one analyst was down on the news because of the reputation the deal could have on Switzerland’s image as a global banking center.

“The whole country’s reputation for sound financial management, sound regulatory oversight and, frankly, being somewhat capricious and boring about investments has been erased,” Octavio Marenzi, CEO of consultancy Opimas LLC, said in an email.

Marenzi added that he expects Switzerland’s direct democracy model of governance will likely lead to court and ballot challenges to the deal, which could lead to more chaos.

Credit Suisse has been designated by the Financial Stability Board, the international body that oversees the global financial system, as one of the world’s systemically important banks. This means that regulators believe that its uncontrolled failure would send ripples throughout the financial system not unlike the collapse of Lehman Brothers 15 years ago.

The deal follows the collapse of two major US banks last week, prompting a frantic, broad-based response from the US government to prevent further banking panics. Still, global financial markets are on edge after Credit Suisse’s share price began to plummet this week.

Many of Credit Suisse’s problems are unique and do not match the weaknesses that brought down Silicon Valley Bank and Signature Bank, whose failures led to significant rescue efforts by the Federal Deposit Insurance Corporation and the Federal Reserve. As a result, their decline does not necessarily herald the beginning of the 2008 financial crisis.

The deal caps a very volatile week for Credit Suisse, especially on Wednesday, when its shares fell to a record low after its largest investor, the National Bank of Saudi Arabia, said it would no longer invest in the bank to avoid sanctions. : would begin if its share rose to about 10%.

Shares fell 8% to 1.86 francs ($2) on the Swiss stock exchange on Friday. The stock has seen a long decline. In 2007 it was selling for over 80 francs.

Its current troubles began after Credit Suisse said on Tuesday that executives had found “significant weaknesses” in the bank’s internal controls over financial reporting as of the end of last year. That fueled fears that Credit Suisse would be the next domino to fall.

Although smaller than its Swiss rival UBS, Credit Suisse still wields considerable influence, managing $1.4 trillion in assets. The firm has significant trading desks around the world, serves the wealthy and the affluent through its wealth management business, and is a major merger and acquisition advisor to global companies. Notably, Credit Suisse did not need government support during the financial crisis in 2008, while UBS did.

Despite the banking turmoil, the European Central Bank on Thursday approved a big, half-percentage point hike in interest rates to try to curb stubbornly high inflation, saying Europe’s banking sector was “resilient” with strong finances.

ECB President Christine Lagarde has said that during the financial crisis, banks are “in a very different position than they were in 2008”, in part because of tighter government regulation.

The Swiss bank is trying to raise money from investors and develop a new strategy to deal with a number of problems, including bad bets on hedge funds, repeated shakeups at its top management and a spying scandal involving UBS.

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Associated Press writers Frank Jordans and Emily Schultheis in Berlin, Barbara Ortutai in Oakland, Calif., and Chris Rugaber in Washington.