Banking crisis: UBS agrees to double down to buy Credit Suisse and avoid a market meltdown

Switzerland’s largest bank UBS, prompted by authorities, agreed on Sunday, March 19, to buy its rival Credit Suisse for $2 billion, according to the Financial Times, agreeing to double the stake in extremis to avoid a debacle and panic in the markets on Monday. According to the financial newspaper, UBS has agreed to double the amount initially proposed to overcome the reluctance of Credit Suisse and one of its main shareholders.

The deal would only be carried out in UBS shares and would value Credit Suisse’s share at a price of 50 cents instead of the initially proposed 25 cents, which remains well below Friday’s share price at closing (1.86 francs). The operation is being examined in Bern by the federal government, which already met urgently on Thursday and Saturday.

According to CH Media, the government is to brief interested parties from 17:00 GMT and then hold a press conference to unveil the details of the deal. The merger between these giants, both of which are part of the very select club of 30 too big to fail banks, should therefore be completed and announced in time for the Asian markets to open. The hope is that this may be enough to prevent widespread panic.

Run to the abyss

The banking sector has been under stress since major central banks sharply hiked their rates in a bid to control inflation. Many institutions have failed to prepare after years of access to cheap money. The recent bankruptcy of Silicon Valley Bank in the US and other US regional banks has increased investor anxiety and prompted them to sell the stocks of banks considered to be the weakest links.

This is the case of Credit Suisse, which for 2 years went from sensational scandals to reverses. And despite its management’s efforts to publicize a three-year restructuring plan, nothing has 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 following a black day on the stock exchange gave the bank only brief respite.

Regulators and the federal government have faced enormous pressure from Switzerland’s major economic partners to clean up the situation before it contaminates the entire world. According to the Financial Times and Blick, the bank’s customers withdrew 10 billion Swiss francs in a single day at the end of last week.

Warranties

According to the Bloomberg agency, UBS requires public authorities to bear the legal costs and potential losses that can amount to billions of francs. On Saturday the discussions ran into the investment banking business, according to the financial agency, one of the scenarios being studied is a recovery only of asset and wealth management with the 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 starting to reap the benefits of its efforts and it has taken huge efforts by the authorities to get the bank’s management agreed to put on the savior’s dress. The Competition Commission could also raise eyebrows depending on the configuration of the acquisition.

Discussions also focus on the fate of Credit Suisse’s Swiss branch, one of the group’s lucrative parts that lost 7.3 billion Swiss francs last year and is still counting on “substantial” losses in 2023.

This branch brings together retail banking and SME lending. One of the avenues considered by analysts is that of an IPO, which could limit layoffs in Switzerland due to duplications with UBS’s activities.

Last Sunday the union of bank employees in Switzerland “demanded” the participation of the social partners in the discussions, given the “enormous” stake for employment. “And when the stock market opens on Monday, Credit Suisse could be a thing of the past,” the tabloid Blick predicted.