UBS buys Credit score Suisse for $3.2 billion as regulators search to prop up international banking system

UBS Chairman of the Board of Directors Colm Kelleher (R) shakes hands with Axel Lehmann (L), Chairman of the Board of Directors of Credit Suisse, after a news conference following talks on Credit Suisse in Bern March 19, 2023.

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UBS ready to buy his embattled rival Swiss credit for 3 billion Swiss francs ($3.2 billion) on Sunday, with Swiss regulators playing a key role in the deal as governments sought to stem contagion that threatened the global banking system.

“With the acquisition of Credit Suisse by UBS, a solution has been found to ensure financial stability and to protect the Swiss economy in this exceptional situation,” said a statement from the Swiss National Bank, which noted that the central bank was in liaison with the Swiss government The Swiss Financial Market Supervisory Authority worked together to bring about the merger of the country’s two largest banks.

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Under the terms of the transaction, Credit Suisse shareholders will receive 1 UBS share for every 22.48 Credit Suisse shares they hold.

“This acquisition is attractive to UBS shareholders, but let’s be clear this is an emergency bailout for Credit Suisse. We have structured a transaction that preserves the company’s remaining value while limiting our downside risk,” UBS President Colm Kelleher said in a statement.

According to UBS, the merged bank will have $5 trillion in invested assets.

“We are determined to make this deal a great success. There are no options,” Kelleher said when asked during the press conference if the bank could back out of the deal. “This is absolutely necessary for the financial structure of Switzerland and … for global finance.”

The Swiss National Bank has pledged a loan of up to 100 billion Swiss francs ($108 billion) to support the takeover. The Swiss government also issued a guarantee to absorb losses of up to 9 billion Swiss francs on certain assets above a set threshold “to reduce risks for UBS,” according to a separate government statement.

Axel Lehmann, Chairman of the Board of Directors of Credit Suisse Group AG, Colm Kelleher, Chairman of the Board of Directors of UBS Group AG, Karin Keller-Sutter, Minister of Finance of Switzerland, Alain Berset, President of Switzerland, Thomas Jordan, President of the Swiss National Bank (SNB), Marlene Amstad, President of the Swiss Financial Market Supervisory Authority (FINMA), left to right, during a press conference in Bern, Switzerland, on Sunday March 19, 2023.

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“This is a commercial solution and not a rescue package,” said Swiss Finance Minister Karin Keller-Sutter at a press conference on Sunday.

The UBS deal was thrown together before markets reopened for trading on Monday, after Credit Suisse shares posted their worst weekly decline since the coronavirus pandemic began. The losses came despite a new loan of up to 50 billion Swiss francs ($54 billion) granted by the Swiss central bank last week to halt the crash and restore confidence in the bank.

News of the deal was welcomed by Treasury Secretary Janet Yellen and Federal Reserve Chair Jerome Powell in a statement. “The US banking system’s capital and liquidity positions are strong and the US financial system is resilient. We have been in close contact with our international colleagues to support their implementation,” they said.

Credit Suisse has already grappled with a string of losses and scandals, and sentiment has been rocked again over the past two weeks as US banks have been reeling from the collapse of Silicon Valley Bank and Signature Bank.

US regulators’ safety freeze on uninsured deposits at the failed banks and the creation of a new funding facility for struggling financial institutions failed to contain the shock and threaten to engulf more banks in the US and abroad.

(From L) Axel Lehmann, Chairman of Credit Suisse, Colm Kelleher, Chairman of UBS, and Karin Keller-Sutter, Swiss Finance Minister, attend a news conference after their meeting on April 19.

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Axel Lehmann, Chairman of Credit Suisse, said in the press conference that the financial instability caused by the collapse of the US regional banks hit the bank at the wrong time.

Despite regulators’ involvement in the pairing, the deal gives UBS autonomy to manage the acquired assets as it sees fit, which could mean significant job cuts, sources told CNBC’s David Faber.

The scope and potential impact of Credit Suisse on the global economy is much larger than that of the US regional banks, which have been pressuring Swiss regulators to find a way to bring together the country’s two largest financial institutions. At around CHF 530 billion at the end of 2022, Credit Suisse’s balance sheet is about twice as large as that of Lehman Brothers when it collapsed. It is also much more globally connected, with several international subsidiaries – which allows for an orderly management of the Credit Suisse situation even more importantly.

The merger of the two competitors was not without problems, but the pressure to avert a systemic crisis prevailed in the end. According to several media reports, UBS initially offered to buy Credit Suisse for around USD 1 billion on Sunday. Credit Suisse reportedly rejected the offer on the grounds that it was too low and would harm shareholders and employees, people familiar with the matter told Bloomberg.

As of Sunday afternoon, UBS was in talks to buy the bank for “significantly” more than CHF 1 billion, sources told CNBC’s Faber. He said the price of the deal rose during the day’s negotiations.

Credit Suisse lost around 38% of its deposits in the fourth quarter of 2022 and announced in its belated annual report earlier last week that outflows have yet to reverse. It reported a net loss of 7.3 billion Swiss francs for the full year in 2022 and expects another “significant” loss in 2023.

The bank previously announced a massive strategic overhaul to address these chronic issues, with current CEO and Credit Suisse veteran Ulrich Koerner taking over in July.

– CNBC’s Elliot Smith contributed to this report.