UBS to buy troubled rival Credit Suisse for almost $3.2 billion, agreed to assume up to $5.4 billion in losses, in a merger engineered by Swiss regulators to avoid further market-shaking turmoil in global banking.
Alain Berset, Swiss President said, “The deal was one of great breadth for the stability of international finance. An uncontrolled collapse of Credit Suisse would lead to incalculable consequences for the country and the international financial system.”
Things to know about the historic deal:
1. The Swiss bank, UBS, is paying $3.25 billion for its rival in an all-share deal that also includes extensive government guarantees and liquidity provisions. The deal includes $108 billion in liquidity assistance for UBS and Credit Suisse from the Swiss central bank.
2. As part of the deal, approximately $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. But these bonds are designed to be wiped out if a bank’s capital falls below a certain level, which was trigger as part of this Swiss government brokered deal.
3. Early trade prices of the euro suggest the single currency was rising on the back of the news.
4. UBS led by Ralph Hamers has emerged as the winner in the deal as the bank’s wealth and asset management assets soar to about $5 trillion and got a special waiver to keep Credit Suisse’s profitable Swiss unit that many analysts said was worth more than triple of what UBS paid for the whole firm.
5. The deal follows the collapse of two large US banks last week that triggered a frantic, broad response from the US government to prevent any further panics.
6. Credit Suisse is among the 30 financial institutions known as globally systemically important banks, and authorities worried about the fallout if it were to fail.
7. Post the Swiss deal, central banks around the world announced coordinated financial moves to stabilise banks in the coming week. This including lending facility for banks looking to borrow US dollars if they need them, a practice which widely used during the 2008 financial crisis.
8. Trouble for Credit Suisse began after it announced of ‘material weaknesses’ in the bank’s internal controls on financial reporting. This fanned the fear that Credit Suisse would be the next domino to fall.
9. Credit Suisse crisis has nothing to do with US banking crisis. Many of the Credit Suisse problems are unique and it is very different from the weaknesses that brought down Silicon Valley bank and Signature Bank. US banks failure led to a significant rescue effort by the Federal Deposit Insurance Corp and the Federal Reserve. As per analysts their downfall does not necessarily signal the start of a financial crisis similar to what occurred in 2008.
10. Credit Suisse is designated as one of the world’s important bank by the financial Stability Board. This means regulators believe its uncontrolled failure would lead to ripples throughout the financial system not unlike the collapse of Lehman Brother in 2008.
