UBS to buy Credit Suisse for nearly $3.25B to calm turmoil

GENEVA

Banking giant UBS is buying troubled rival Credit Suisse for almost $3.25 billion, in a deal orchestrated by regulators to stave off further market-shaking turmoil in the global banking system.

Swiss authorities urged UBS to take over its smaller rival after a plan for Credit Suisse to borrow up to 50 billion francs ($54 billion) failed to reassure investors and the bank’s customers. Shares of Credit Suisse and other banks plunged after the failure of two banks in the U.S. raised questions about other potentially shaky global financial institutions.

Credit Suisse is among 30 financial institutions known as globally systemically important banks, and authorities worried about the fallout if it were to fail.

The deal was “one of great breadth for the stability of international finance," Swiss President Alain Berset said as he announced it Sunday night. "An uncontrolled collapse of Credit Suisse would lead to incalculable consequences for the country and the international financial system.”

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

Markets remain jittery despite the best efforts of regulators to restore calm. Shares fell Monday in Asia, with Hong Kong's Hang Seng index down 2.7% and Tokyo's benchmark Nikkei 225 losing 1.2%. Bank shares in the region were lower and futures in London and Frankfurt also fell.

Credit Suisse Chairman Axel Lehmann called the sale to UBS “a clear turning point.”

“It is a historic, sad and very challenging day for Credit Suisse, for Switzerland and for the global financial markets,” Lehmann said, adding that the focus is now on the future and on Credit Suisse's 50,000 employees, 17,000 in Switzerland.

Following news of the Swiss deal, the world’s central banks announced coordinated moves to stabilize banks, including access to a lending facility for banks to borrow U.S. dollars if they need them, a practice widely used during the 2008 crisis. Three months after Lehman Brothers collapsed in September of 2008, such swap lines had been tapped for $580 billion. Swap lines also were rolled out during market turmoil in the early stages of the COVID-19 pandemic.

“Today is one of the most significant days in European banking since 2008, with far-reaching repercussions for the industry," said Max Georgiou, an analyst at Third Bridge. “These events could alter the course of not only European banking but also the wealth management industry more generally.”

Colm Kelleher, the UBS chairman, hailed “enormous opportunities” from the takeover and highlighted his bank’s “conservative risk culture” — a subtle swipe at Credit Suisse's reputation for more swashbuckling gambles in search of bigger returns. He said the combined group would create a wealth manager with over $5 trillion in total invested assets.

UBS officials said they plan to sell off parts of Credit Suisse or reduce the bank’s size.

Swiss Finance Minister Karin Keller-Sutter said 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 situation at all.”

The combination of the two biggest and best-known Swiss banks, each with storied histories dating to the mid-19th century, amounts to a thunderclap for Switzerland’s reputation as a global financial center — putting it on the cusp of having a single national banking champion.

The deal follows the collapse of two large U.S. banks last week that spurred a frantic, broad response from the U.S. government to prevent further panic.

European Central Bank President Christine Lagarde lauded the “swift action” by Swiss officials, saying they were “instrumental for restoring orderly market conditions and ensuring financial stability.”

She reiterated that the European banking sector is resilient, with strong financial reserves and plenty of ready cash. The banks “are in a completely different position from 2008” during the financial crisis, partly because of stricter government regulation, she said.

The Swiss government is providing more than 100 billion francs to support the takeover.

As part of the deal, approximately 16 billion francs ($17.3 billion) in Credit Suisse bonds will be wiped out. European bank regulators use a special type of bond designed to provide a capital cushion to banks in times of distress. The bonds are designed to be wiped out if a bank’s capital falls below a certain level, and that was triggered by the government-brokered deal.

Berset said the Federal Council had been discussing Credit Suisse's troubles since early this year and held urgent meetings last week.

Investors and banking industry analysts were still digesting the deal, but at least one analyst suggested the deal might tarnish Switzerland’s global banking image.

“A country-wide reputation with prudent financial management, sound regulatory oversight, and, frankly, for being somewhat dour and boring regarding investments, has been wiped away,” said Octavio Marenzi, CEO of consulting firm Opimas LLC, in an email.

The Financial Stability Board, an international body that monitors the global financial system, designated Credit Suisse as one of the world’s important banks, meaning that regulators feared a collapse could ripple throughout the financial system like that of Lehman Brothers 15 years ago.

The Credit Suisse parent bank is not part of European Union supervision, but it has entities in several European countries that are.

Credit Suisse’s troubles resurfaced after it reported managers had identified “material weaknesses” in its internal controls on financial reporting. That fanned fears it would be the next domino to fall. Many of its problems are unique and unlike the weaknesses that brought down Silicon Valley Bank and Signature Bank. Their failures led to significant rescue efforts by the Federal Deposit Insurance Corp. and the Federal Reserve to prevent a crisis similar to what occurred in 2008.

Credit Suisse's shares plunged Wednesday to a record low after its largest investor, the Saudi National Bank, said it wouldn't invest any more money in the bank to avoid tripping regulations that would kick in if its stake rose about 10%.

On Friday, its shares dropped 8% to close at 1.86 francs ($2) on the Swiss exchange. The stock has seen a long downward slide: It traded at more than 80 francs in 2007.

UBS is bigger but Credit Suisse still wields considerable influence, with $1.4 trillion assets under management. It has significant trading desks around the world, caters to the rich through its wealth management business, and is a major mergers and acquisitions advisor. The bank did weather the 2008 financial crisis without assistance, unlike UBS.

Credit Suisse is seeking to raise money from investors and roll out a new strategy to overcome an array of troubles, including bad bets on hedge funds, repeated shake-ups of its top management and a spying scandal involving UBS.