After intense negotiations, the first Swiss banking group UBS will buy its rival Credit Suisse, Swiss Confederation President Alain Berset said on Sunday, believing it was the best way to “restore confidence”. This solution “is decisive not only for Switzerland (…) but for the stability of the entire financial system”, underlined Mr Berset at a press conference in the presence of the presidents of the two giants. banks, Colm Kelleher for UBS and Axel Lehmann for Credit Suisse.
Finance Minister Karin Keller-Sutter told the press conference that Credit Suisse’s bankruptcy could have caused “irreparable economic damage”. “For this reason, Switzerland must take its responsibility beyond its own borders.” The ECB, then the Fed and the US Treasury Department welcomed the swift action, which is likely to calm tense markets.
The transaction amounts to 3 billion Swiss francs (3.02 billion euros) payable in UBS shares, or 76 cents alone for a Credit Suisse share that was still worth 1.86 Swiss francs on Friday night.
The merger between these giants, which are both part of the very closed club of 30 too big to fail banking institutions, therefore had to be completed and announced in time for the opening of the Asian markets. The hope is that this may be enough to prevent widespread panic.
The banking sector has been under pressure since major central banks raised their rates sharply in an attempt to contain inflation. Many institutions have not prepared themselves after years of access to cheap money.
The recent bankruptcy of the United States Silicon Valley Bank and other regional US banks has increased investors’ anxiety and prompted them to sell the securities of the banks perceived as the weak links. This is the case of Credit Suisse, which has gone from resounding scandals to setbacks in two years.
And despite management’s best efforts to tout a three-year restructuring plan, nothing worked. Investors voted with their feet and the Zurich establishment struggled to access liquidity at reasonable prices.
A 50 billion Swiss franc lifeline launched by the Swiss central bank on Wednesday after a black day on the stock market gave the bank only a brief respite.
Regulatory authorities and the federal government have faced enormous pressure from Switzerland’s main economic partners to clean up the situation before it infects the entire world. According to the Financial Times and Blick, the bank’s customers withdrew 10 billion Swiss francs in one day at the end of last week.
According to the Bloomberg agency, UBS requires the government to bear legal costs and potential losses, which could amount to billions of francs. On Saturday, discussions about investment banking activity stumbled, according to the financial agency, one of the scenarios being examined is a resumption of wealth and asset management only with a sale of this branch.
By contrast, UBS, which spent several years recovering from the shock of the 2008 financial crisis and a massive state bailout, is beginning to reap the rewards of its efforts and it has taken enormous efforts from the authorities to ensure that management of the pew agreed put on the robe of the redeemer. Depending on the configuration of the takeover, the Competition Commission could also raise its eyebrows.
The discussions also focus on the fate reserved for the Swiss arm of Credit Suisse, one of the group’s profitable parts that lost 7.3 billion Swiss francs last year and still counts on “significant” losses in 2023.
This branch brings together retail banking and lending to SMEs. One of the options being considered by analysts is that of an IPO, which could limit layoffs in Switzerland due to overlaps with UBS’s activities.
On Sunday, the union of bank employees in Switzerland “demands” the participation of the social partners in the discussions, given the “huge” commitment to employment. “And when the stock market opens on Monday, Credit Suisse could be a thing of the past,” predicted tabloid Blick.
Major social risks for employees
The Swiss Association of Bank Employees (ASEB) “demands the immediate establishment of a task force”, a team to tackle the problems of “jobs at risk”, the union writes in a press release.
“No decision should be made before the social partners are involved,” he added. “For the approximately 17,000 employees of Credit Suisse in Switzerland, the stakes are huge,” emphasizes Aseb. The union emphasizes the need for measures to deal with the “dramatic” economic impact on employment.
Like UBS, active in asset management and investment banking, Credit Suisse, like its competitor, relies on local activities, which mainly offer mortgages and loans to SMEs. In Switzerland, the retail bank has 95 branches, compared to about 200 at UBS. The risks of duplication are considered significant, to the extent that the profiles of UBS and Credit Suisse are comparable.