Inside the deal

UBS and SNB takeover and rescue Credit Suisse

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UBS has completed its takeover and rescue of Credit Suisse with the support of The Swiss National Bank (SNB). 

Furthermore, the move was backed by the Swiss federal government and regulatory body FINMA, The Swiss Financial Market Supervisory Authority

An “exceptional situation” has led to UBS taking over Credit Suisse, securing financial stability and protecting the Swiss economy. 

In addition, both banks will now have unrestricted access to the SNB’s existing facilities, through which they can obtain liquidity. Also, both Credit Suisse and UBS can obtain a liquidity assistance loan with privileged creditor status in bankruptcy for a total amount of up to CHF100bn ($108.3bn). 

The provision of liquidity will ensure that both banks have access to the necessary liquidity. By providing substantial liquidity assistance, the SNB is fulfilling its mandate to contribute to the stability of the financial system, and it continues to work closely with the federal government and FINMA to this end. 

As recently as two days ago, it was rumoured that the two banks were against a merger

The day before, the Swiss National Bank (SNB) and FINMA announced that they will provide Credit Suisse Group with additional liquidity if required. 

The move was aimed at offering relief to the embattled Swiss bank and prevent a global banking crisis. 

It coincides with the bank’s announcement to borrow up to CHF50bn ($54bn) from the SNB to raise its liquidity and investor confidence.

What next?

UBS Group is set to reduce the size of Credit Suisse Group’s investment bank in order to curb the losses incurred by its newly acquired rival, Bloomberg quoted UBS chairman Colm Kelleher as saying. 

The move could terminate Credit Suisse’s plans to carve out portions of its investment bank under the brand of CS First Boston.  

Announcing the deal at a press conference, Kelleher said: “Let me be very specific on this: UBS intends to downsize Credit Suisse’s investment banking business and align it with our conservative risk culture. 

“We will be de-risking a lot of the tricky businesses that we are inheriting.” 

Kelleher further noted that the merged investment banks of UBS and Credit Suisse will not include more than 25% of the total firm’s risk-weighted assets in future. 

As part of the acquisition, UBS will absorb a portfolio of ‘difficult-to-assess illiquid assets, such as long-dated derivatives and swaps. For these assets, UBS brokered a deal to receive loss guarantee from the government of Switzerland. 

Due to rapid pace at which the deal has been brokered, UBS was unable to carry out proper due diligence on the portfolio. 

However, Credit Suisse is believed to have marked those correctly, according to Kelleher. 

The bank is set to accept any first losses on closing the portfolio of up to CHF5bn, with the government providing an additional CHF9bn in the event of any possible losses. 

Besides, Kelleher said that UBS has its own investment banking arm, without offering any insights on the group’s spin-off plans directly.

Susannah Streeter, head of money and markets, Hargreaves Lansdown, said: ‘’Credit Suisse was on life support and Swiss authorities believed only a full transplant of the banks divisions into UBS would restore stability to the banking system. But an operation of this magnitude is a big risk for UBS – that’s why it was only willing to pay $3.23 billion, less than half the price its shares valued the bank at on Friday. It will not only have to accept the healthier parts of the business but its failing ones as well – particularly its investment division, which has been mired in crisis after crisis. UBS will now be looking to chop up and sell off big chunks of operations, to slim down in size, given that the combined balance sheet is twice the size of Switzerland’s economy.

“The speed at which the 167-year-old institution deteriorated, when it was previously deemed too big to fail, has rocked the banking sector. As the shockwaves continue to ripple central banks have taken rear guard action to reduce the risks of contagion. They’ve co-ordinated currency swaps to enable the smooth flow of money around the world, to ensure financial institutions can easily tap into the dollars they need to operate.”