Shares of Credit Suisse plunged 63% in early trading Monday after the announcement that banking giant UBS would buy its troubled rival for almost $3.25 billion in a deal orchestrated by regulators to stave off further market-shaking turmoil in the global banking system.
UBS shares were down 14% in early trading on the Swiss stock exchange.
Swiss authorities urged UBS to take over its smaller rival after a plan for Credit Suisse to borrow up to 50 billion francs ($54 billion) failed to reassure investors and the bank’s customers. Shares of Credit Suisse and other banks plunged after the failure of two banks in the U.S. raised questions about other potentially shaky global financial institutions.
Credit Suisse is among 30 financial institutions known as globally systemically important banks, and authorities worried about the fallout if it were to fail.
The deal was “one of great breadth for the stability of international finance,” Swiss President Alain Berset said as he announced it Sunday night. “An uncontrolled collapse of Credit Suisse would lead to incalculable consequences for the country and the international financial system.”
Switzerland’s executive branch, a seven-member governing body that includes Berset, passed an emergency ordinance allowing the merger to go through without shareholder approval.
Markets remain jittery despite the best efforts of regulators to restore calm. Global stock markets sank Monday, with Hong Kong’s main index sliding more than 3%. Market benchmarks in Frankfurt and Paris opened down more than 1%. Shanghai, Tokyo and Sydney also declined. Wall Street futures were off 1%. Oil prices plunged more than $2 per barrel.
Credit Suisse Chairman Axel Lehmann called the sale to UBS “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 on Credit Suisse’s 50,000 employees, 17,000 in Switzerland.
Following news of the Swiss deal, the world’s central banks announced coordinated moves to stabilize banks, including access to a lending facility for banks to borrow U.S. dollars if they need them, a practice widely used during the 2008 crisis. Three months after Lehman Brothers collapsed in September of 2008, such swap lines had been tapped for $580 billion. Swap lines also were rolled out during market turmoil in the early stages of the COVID-19 pandemic.
“Today is one of the most significant days in European banking since 2008, with far-reaching repercussions for the industry,” said Max Georgiou, an analyst at Third Bridge. “These events could alter the course of not only European banking but also the wealth management industry more generally.”
Colm Kelleher, the UBS chairman, hailed “enormous opportunities” from the takeover and highlighted his bank’s “conservative risk culture” — a subtle swipe at Credit Suisse’s reputation for more swashbuckling gambles in search of bigger returns. He said the combined group would create a wealth manager with over $5 trillion in total invested assets.
UBS officials said they plan to sell off parts of Credit Suisse or reduce the bank’s size.
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 to the mid-19th century, amounts to a thunderclap for Switzerland’s reputation as a global financial center — putting it on the cusp of having a single national banking champion.
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 further panic.
European Central Bank President Christine Lagarde lauded the “swift action” by Swiss officials, saying they were “instrumental for restoring orderly market conditions and ensuring financial stability.”
She reiterated that the European banking sector is resilient, with strong financial reserves and plenty of ready cash. The banks “are in a completely different position from 2008” during the financial crisis, partly because of stricter government regulation, she said.
The Swiss government is providing more than 100 billion francs to support the takeover.
As part of the deal, approximately 16 billion francs ($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. The bonds are designed to be wiped out if a bank’s capital falls below a certain level, and that was triggered by the government-brokered deal.
That has triggered concern the market for those bonds and for other banks that hold them.
Berset said the Federal Council had been discussing Credit Suisse’s troubles since early this year and held urgent meetings last week.
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