A merger to reassure a troubled banking sector? The Swiss authorities rushed to force a merger between the bank Credit Suisse and its rival UBS, for a cost of more than 3 billion Swiss francs. We look back at this rescue in extremis, and what it says about banking institutions.
Credit Suisse forced to merge with UBS
It’s a historic takeover, and one that shows the extent of the banking crisis that has spread around the world. Switzerland’s largest bank, UBS, confirmed yesterday that it would buy Credit Suisse, for twice what it initially offered. The Swiss authorities have been pushing hard for the deal, even planning to change the law to avoid a shareholder vote.
Seven federal councillors (the equivalent of our ministers) met in Bern at the Ministry of Finance, along with representatives of the Swiss National Bank (SNB), as well as regulators and of course representatives of the two banks in question. The discussions ended at 7:30 pm last night, and it was the Swiss president Alain Berset himself who announced the takeover.
3 billion Swiss francs (about 3 billion euros) were put on the table to save the financial giant. A disproportionate sum, which shows the extent of what the authorities sought to avoid. Karin Keller-Sutter, the Swiss Minister of Finance, said yesterday that the collapse of Credit Suisse would have caused “irreparable economic damage” to Switzerland, but also to the global economy.
An exceptional buyout, with exceptional guarantees
According to the Minister of Finance, it was indeed a matter of Switzerland “assuming its responsibilities beyond its own borders”. And this responsibility has a cost: beyond forcing the hand of failing banking institutions, the government confirmed that UBS would benefit from a 9 billion Swiss franc guarantee. This is a way to protect the institution if it were to find problems with Credit Suisse portfolios.
In addition, the country’s central bank will provide liquidity of up to 100 billion francs to Credit Suisse and UBS, to ensure the bank’s return to its new home. The huge sum shows the importance of Credit Suisse until now. It is a bank among the thirty banking institutions considered too important to sink: those on which the current financial system is based.
The questions raised by the acquisition of Credit Suisse by UBS
While European Central Bank President Christine Lagarde welcomed swift decisions that she said would help “restore orderly market conditions,” not everyone is happy about the snap takeover. Starting with Credit Suisse shareholders, who are largely left out. They will receive 1 UBS share for every 22.48 Credit Suisse shares they own. A total rout, which shows that the government has got rid of the usual modus operandi to force a decision.
The other issue raised is of course that of the banks considered “too big too fail”. If Credit Suisse is favored by governments, and brings together a political-financial elite all Sunday, this would not necessarily be the case for other banks. An idea confirmed across the Channel by US Treasury Secretary Janet Yellen, who admitted this week that in the United States in any case, not all banks will be treated the same way:
Incredible sequence.
A senator gets the Treasury Secretary to say that only deposits in the banking behemoths are guaranteed because of systemic risk.
The kiss of death for small banks!
The “too big to fail” logic taken to its extreme. https://t.co/ytKg7N2RwH
– Anice Lajnef (@AniceLajnef) March 18, 2023
In a broader sense, one can only underline once again the links between the political action of elected governments and private banking institutions. While the latter are important links in the global system, we cannot forget that they are commercial actors. The arrival of the Swiss government and central bank to the rescue therefore highlights systemic issues.
For the Swiss government, the challenge was to find an agreement before the opening of the world’s stock exchanges this morning. However, Credit Suisse shares were down more than 60% this morning in pre-market trading. The coming hours will tell us if the crisis has been contained, and if the government’s actions have prevented the bulk of the contagion.
In any case, the affair has the air of a repetition. During the 2008 crisis, it was UBS itself that was hit hard… and that was supported by the Swiss Central Bank and the government. 6 billion francs of the Swiss Confederation were then directed to UBS. Today, however, it is the latter that comes as a savior: history is a perpetual restart, they say.
