UBS, Switzerland’s largest bank, has agreed to acquire its troubled rival Credit Suisse for almost $3.25 billion in a deal brokered by Swiss regulators to avoid further turmoil in the global banking system.
The acquisition was sanctioned by the Swiss authorities following the failure of the central bank to convince customers and investors of the bank’s future and viability despite injecting $54 billion into it last week.
Despite the new agreement reached between the two largest banks in Switzerland, the shares of Credit Suisse plummeted by 159.13% to 0.76 CHF on Monday while UBS shares lost 5.11% to 16.24 CHF as at the time of writing. The declines highlighted investors concerns especially when it comes to global banking system.
As part of the agreement, Credit Suisse’s high-risk bonds estimated at $17.3 billion will be wiped out. Credit Suisse is among 30 financial institutions known as globally systemically important banks, and authorities were worried about the fallout if it were to fail.
While analysts and financial leaders have suggested that safeguards are stronger since the 2008 global financial crisis and that banks worldwide have plenty of available cash and support from central banks, concerns about the risks to the deal, losses for some investors, and Credit Suisse’s falling market value could renew fears about the health of banks.
The acquisition is a significant turning point for Credit Suisse, which has faced an array of troubles in recent years, including bad bets on hedge funds, repeated shake-ups of its top management, and a spying scandal involving UBS.
UBS is bigger, but Credit Suisse wields considerable influence, with $1.4 trillion assets under management. It has significant trading desks around the world, caters to the rich through its wealth management business, and is a major mergers and acquisitions advisor. Credit Suisse did weather the 2008 financial crisis without assistance, unlike UBS.
The combination of the two largest and best-known Swiss banks, each with storied histories dating to the mid-19th century, puts Switzerland’s reputation as a global financial center on the cusp of having a single national banking champion. However, the shotgun wedding orchestrated by Swiss regulators may lead to a period of uncertainty and volatility in the banking sector.
