UBS rescues Credit Suisse, but banking shares continue to tumble

Swiss banking giant UBS has bought beleaguered lender Credit Suisse in a rescue deal brokered over the weekend. 

In a statement, the Swiss National Bank said: “With the takeover of Credit Suisse by UBS, a solution has been found to secure financial stability and protect the Swiss economy in this exceptional situation.”

“The substantial provision of liquidity will ensure that both banks have access to the necessary liquidity,” it added. 

A Credit Suisse rescue deal was essential to the stability of the Swiss economy as it was a systemically important bank. “An uncontrolled collapse of Credit Suisse would lead to incalculable consequences for the country and the international financial system,” said Swiss President Alain Berset.

UBS will pay US$3.25bn for Credit Suisse in a deal that will see shareholders receiving 0.76CHF for shares that were worth 1.86CHF at the end of last week. Additional tier one bond owners will lose all of their investment. 

“This acquisition is attractive for UBS shareholders but, let us be clear, as far as Credit Suisse is concerned, this is an emergency rescue,” UBS chairman Colm Kelleher told the press when the deal was announced. “It is absolutely essential to the financial structure of Switzerland and…to global finance,” he added. 

A downward spiral 

Credit Suisse’s problems began in 2021 in the wake of the Archegos scandal. Archegos Capital Management (Archegos) was a family-run investment office owned by Bill Hwang. Archegos ran into trouble when it became over-reliant on leverage to chase higher returns in the market. Its lenders began to get nervous because Hwang was losing too much money through his leveraged investments, so they issued a margin call, which resulted in the collapse of the fund. The total losses are estimated to be around US$20bn. Credit Suisse was one of Hwang’s biggest lenders and lost US$4.7bn.

This triggered the sell-off in Credit Suisse’ shares, worsened by the resignation of the bank’s chairman, Antonio Horta-Osorio in January 2022, just eight months after he was hired. He had been accused of breaking Covid-19 rules.  

In July 2022, the bank’s new CEO, Ulrich Koerner, brought fresh hope in the form of a strategic overhaul, but failed to convince investors. Rumours about a possible collapse – which were unsubstantiated, but dangerous nonetheless – began to circulate, further eroding customer confidence. 

The collapse of Silicon Valley Bank last week sent shockwaves across the US banking sector, resulting in the collapse of another US firm, Signature Bank, the same week. 

This has spooked global markets, with depositors rapidly withdrawing funds. Global banking shares were down across the board this morning, despite news of the UBS Credit Suisse takeover. 

“This is going to be pretty bumpy going forward,” said Mohamed El-Erian, chief economic adviser at Allianz SE and a columnist for Bloomberg. “People are doing something that probably is not rational but is totally understandable – they’re moving deposits. That dynamic isn’t going to stop overnight, neither are the losses that are being incurred.”