Banking giant UBS acquiring Credit Suisse for $3.2 billion

Banking giant UBS is buying its smaller rival Credit Suisse for $3.2 billion in an effort to avoid further market-shaking turmoil in global banking, Swiss President Alain Berset announced on Sunday night.

Berset called the announcement “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.”

The Swiss Federal Council, a seven-member governing body that includes Berset, passed an emergency ordinance that allows the merger to go through without the approval of shareholders.

Credit Suisse Chairman Axel Lehmann called the deal “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 in particular on the 50,000 Credit Suisse employees, 17,000 of whom are in Switzerland.

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

Berset said the council had agreed to guarantee a total of 150 billion francs ($162 billion) of liquidity to Credit Suisse, well beyond the 50 billion Swiss francs ($54 billion) figure that had been announced publicly. But that didn’t appear to be enough.

“We noted that the outflows of liquidity and the volatility of the markets demonstrated that necessary confidence could no longer be restored, and a rapid solution guaranteeing stability was essential.”

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 back to the mid-19th century, amounts to a thunderclap for Switzerland’s reputation as a global financial center — leaving it on the cusp of having a single national champion in banking.

While UBS is buying Credit Suisse, UBS officials said they plan to sell off parts of Credit Suisse, or reduce the size of the bank over the coming months and years.

The Swiss central bank has agreed to provide a loan of 100 billion Swiss francs ($108 billion) backed by a federal default guarantee to support the deal, which is expected to be completed by the end of the year.

Berset said the Federal Council — Switzerland’s executive branch — had already been discussing a long-troubled situation at Credit Suisse since the beginning of the year, and held urgent meetings over the last four days amid spiraling concerns about its financial health that caused major swoons in its stock price and raised the specter of the 2007-2008 financial crisis.

Investors and banking industry analysts were still digesting the deal, but one analyst was sour on the news due to the reputational damage the deal might have on Switzerland’s image as a global banking center.

“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.

Marenzi added he expected Switzerland’s direct democracy governmental model is likely to result in court and ballot challenges for this deal, potential leading to more chaos.

Credit Suisse is designated by the Financial Stability Board, an international body that monitors the global financial system, as one of the world’s globally systemic important banks. This means regulators believe its uncontrolled failure would lead to ripples throughout the financial system not unlike the collapse of Lehman Brothers 15 years ago.

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 any further bank panics. Still, global financial markets have been on edge since Credit Suisse’s share price began plummeting this week.

Many of Credit Suisse’s problems are unique and do not overlap with the weaknesses that brought down Silicon Valley Bank and Signature Bank, whose failures led to a significant rescue effort by the Federal Deposit Insurance Corporation and the Federal Reserve. As a result, their downfall does not necessarily signal the start of a financial crisis similar to what occurred in 2008.

The deal caps a highly volatile week for Credit Suisse, most notably on Wednesday when its shares plunged to a record low after its largest investor, the Saudi National Bank, said it wouldn’t invest any more money into the bank to avoid tripping regulations that would kick in if its stake rose about 10%.

On Friday, 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.

Its current troubles began after Credit Suisse reported on Tuesday that managers had identified “material weaknesses” in the bank’s internal controls on financial reporting as of the end of last year. That fanned fears that Credit Suisse would be the next domino to fall.

While smaller than its Swiss rival UBS, Credit Suisse still wields considerable influence, with $1.4 trillion assets under management. The firm has significant trading desks around the world, caters to the rich and wealthy through its wealth management business, and is a major advisor for global companies in mergers and acquisitions. Notably, Credit Suisse did not need government assistance in 2008 during the financial crisis, while UBS did.

Despite the banking turmoil, the European Central Bank on Thursday approved a large, half-percentage point increase in interest rates to try to curb stubbornly high inflation, saying Europe’s banking sector is “resilient,” with strong finances.

ECB President Christine Lagarde said the banks “are in a completely different position from 2008” during the financial crisis, partly because of stricter government regulation.

The Swiss bank has been pushing 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.