The agreement was made “urgently” and “under pressure” from Switzerland’s main economic partners to avoid widespread panic on the stock markets. The Swiss government will provide a guarantee of 9 billion euros to UBS for the acquisition.
Switzerland’s largest bank, UBS, under pressure from the authorities, agreed on Sunday to buy rival Credit Suisse for $2 billion, according to the Financial Times newspaper.
The figure is double the first offer made, in an operation that seeks to prevent the collapse of the entity and panic in the markets. According to the Times, UBS agreed to double the amount initially proposed to overcome the reluctance of Credit Suisse and one of its major shareholders.
The operation would be carried out solely with UBS shares, assuming a price of 0.5 Swiss francs per share for Credit Suisse shares, double the 0.25 initially proposed, but still well below the 1.86 francs that They were trading at the close on Friday.
The merger of the two banking giants, which are part of the group of 30 banks considered key in the global financial system, should be completed and announced in time for the opening of the Asian markets. The hope is that the announcement will be enough to prevent a general panic.
The banking sector has been under strain since major central banks raised rates sharply in an attempt to control inflation.
The president of the Swiss Confederation, Alain Berset, affirmed that it is the best way to “restore confidence”. This solution “is not only decisive for Switzerland (…) but for the stability of the entire global financial system,” Berset said.
Effect of the fall of Silicon Valley Bank
The failure of Silicon Valley Bank in the United States and other regional banks increased investor anxiety and caused the crisis in other entities considered weak. This is the case of Credit Suisse, which has been immersed in various scandals for two years that it failed to resolve despite the efforts of its management, which announced a three-year restructuring plan.
Regulators and the federal government acted under immense pressure from Switzerland’s main economic partners to clean up the situation before it spread to the entire world.
According to Bloomberg, UBS has demanded that the government bear legal costs and potential losses, which could run into billions of francs.
UBS, which took several years to recover from the 2008 financial crisis and a massive state bailout, is beginning to reap the rewards of its efforts. This is why it was necessary to apply pressure from the authorities before the bank’s management agreed to assume the role of rescuer of Credit Suisse.
Switzerland gives UBS a €9bn guarantee to buy Credit Suisse
Because of the risks, the Swiss Confederation will provide a guarantee equivalent to more than 9 billion euros to reduce the risks UBS bank incurs by taking over Credit Suisse, Finance Minister Karin Keller-Sutter said.
This guarantee works “as if it were insurance” and will cover eventual losses “of a very specific portfolio” of Credit Suisse and only if these losses exceed a threshold that the minister did not specify.
Keller-Sutter indicated that the bankruptcy of Credit Suisse “would have had irreparable consequences” not only for Switzerland, but for banks in the rest of the world and that for this reason “we assume responsibilities that go beyond our own borders.”