Banking behemoth UBS is purchasing ailing rival Credit Suisse for over $3.25 billion in a deal arranged by authorities in an effort to avert further market-shaking instability in the global banking sector.
Swiss regulators pushed for UBS to acquire its smaller rival after a plan for Credit Suisse to borrow up to 50 billion francs (USD 54 billion) failed to convince investors and the bank’s clients.
Following the failure of two US banks this week, which raised fears about other potentially unstable institutions in the global financial system, shares of Credit Suisse and other banks fell precipitously.
Authorities are concerned about the repercussions if Credit Suisse fails because it is one of the 30 financial firms classified as internationally systemically significant banks.
The transaction was extremely significant for the stability of global finance.” Alain Berset, the president of Switzerland, made the announcement on Sunday evening: “Unimaginable repercussions for the nation and the global financial system would result from an unchecked collapse of Credit Suisse.
An emergency ordinance permitting the merger to proceed without shareholder approval was passed by Switzerland’s executive branch, a seven-member governing body that includes Berset.
Axel Lehmann, chairman of Credit Suisse, referred to the sale as a significant turning point.
Lehmann stated that it is a historic, depressing, and extremely difficult day for Credit Suisse, Switzerland, and the international financial markets and that the emphasis is now on the future, particularly for the 50,000 employees of Credit Suisse, 17,000 of whom work in Switzerland.
The announcement of synchronized financial actions to support banks in the upcoming week came after news of the Swiss agreement. This includes having constant access to a lending facility for banks seeking to borrow US dollars as necessary—a move that was frequently made during the 2008 financial crisis. Such exchange lines had been used for USD 580 billion three months after the September 2008 bankruptcy of Lehman Brothers. Moreover, additional swap lines were launched amid market turbulence at the start of the COVID-19 pandemic in March 2020.
The chairman of UBS, Colm Kelleher, praised the vast prospects that result from the acquisition and emphasized his bank’s cautious risk culture in a subtle dig at Credit Suisse’s reputation for more daring, aggressive bets in search of greater rewards. He said that the combined organization would provide a wealth manager with a total invested asset base of more than $5 trillion.
The merger of Switzerland’s two biggest and most renowned banks, each with a historic history dating back to the middle of the 19th century, is a thunderclap for the nation’s reputation as a major worldwide financial hub and puts it on the edge of having a single national banking champion.
Following the failure of two big American banks last week, the US government launched a broad, frenetic response in an effort to stop any more panic. Yet, since the share price of Credit Suisse started declining this week, the world’s financial markets have been on edge.
Credit Suisse bonds worth about 16 billion francs (USD 17.3 billion) will be eliminated as part of the agreement. In order to give banks a capital buffer during difficult times, European bank regulators use a specific kind of bond. However, these bonds are intended to be canceled if a bank’s capital falls below a specific threshold, which was triggered as part of this government-brokered agreement.
The agreement brings to an end a very unpredictable week for Credit Suisse, most notably the record-setting decline in its shares on Wednesday after its largest shareholder, the Saudi National Bank, said it would stop investing in the bank to avoid violating regulations that would take effect if its stake increased by about 10%.
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