It's the dawn of a new era in the history of European and world finance.
An era marked by the disappearance of a bank created 167 years ago, but which was weighed down by repeated scandals.
Credit Suisse, once a Swiss and European financial flagship, will be swallowed up by its rival and compatriot UBS, the Swiss government announced on Sunday, March 19.
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"The Federal Council is therefore confident that in this difficult situation, the takeover of Credit Suisse by UBS is the best solution for restoring the confidence that has been lacking in financial markets recently, and for best managing the risk to our country and its citizens," a government official stated during a press conference.
A sign that the deal was driven by the government, was that the government officials took center stage in the press conference announcing the transaction. UBS Chairman Colm Kelleher and Credit Suisse Chairman Axel Lehman were placed at the far end of the table.
First Major Merger Since 2008
It was the Swiss officials who took the floor first to explain the necessity of the forced marriage between the two Swiss banks, which are a national pride and the cornerstone of the domestic financial system.
The merger between UBS and Credit Suisse is also the first major global banking operation since the 2008 financial crisis that devastated the global economy and nearly brought down the financial system.
It comes after a crisis of confidence in banks, sparked by the sudden collapse of California-based Silicon Valley Bank on Mar. 10, after interest rate bets went wrong. The crisis of confidence crossed the Atlantic and hit Credit Suisse, a bank weakened by scandals, trying to turn itself around since last October.
The Swiss authorities granted a loan of almost $54 billion to the bank on Mar. 15, but this was not enough to reassure the investors, who continued to sell off Credit Suisse shares to the point where the bank's market value fell to $7.3 billion on Mar. 17.
The transaction, which is an all-share deal, is valued at 3 billion Swiss francs, equivalent of $3.24 billion. Credit Suisse shareholders will receive 1 UBS share for every 22.48 Credit Suisse shares held, equivalent to CHF 0.76/share.
The Swiss government has also responded favorably to a request from UBS for a financial guarantee in the event that Credit Suisse's legal problems return in the form of fines or lawsuits. It will provide a $9 billion backstop to the bank for the risks it is undertaking.
"In order to reduce any risks for UBS, the federal government is also granting UBS a guarantee in the amount of CHF 9 billion to assume potential losses arising from certain assets that UBS takes over as part of the transaction, should any future losses exceed a certain threshold," it said in a press release.
The Swiss National Bank will also provide more than $100 billion of liquidity to UBS, to help facilitate the deal.
No Shareholder Vote
The transaction is not subject to shareholder approval, UBS said. The bank indicated that it obtained a pre-agreement from Swiss regulators -- FINMA, the Swiss National Bank, the Swiss Federal Department of Finance and other regulators -- on the timely approval of the transaction.
This last measure risks provoking the discontent of shareholders and is likely to lead to disputes before the courts, but it also shows the race against time in which the authorities were launched, in their effort to reassure investors.
The deal comes after three days of intense talks, which saw UBS and Credit Suisse very reluctant to tie the knot. The former felt that the bank was doing well and did not need to be saddled with a deal that could only bring it problems. The latter felt that its turnaround plan would be enough to recover. But the Swiss authorities feared that the crisis of confidence suffered by Credit Suisse would intensify and, above all, that it would spread to other banks.
"I am grateful for the strong support of the Swiss Federal Council, the Federal Department of Finance, and the Swiss National Bank who initiated the discussions," Kelleher said during the press conference. "We have agreed a framework of support with the Swiss regulators, which ensures a successful integration in the best interest of Switzerland and protects our shareholders."
Kelleher will be the Chairman of the new company while Ralph Hamers, UBS' current CEO will be the Chief Executive Officer. It will have more than $5 trillion in assets. It will have about 30% of the country's domestic loans and deposits.
Kelleher said that UBS intends to downsize Credit Suisse's investment banking business and align it with UBS' "conservative risk culture."
"It is intended that the combined investment banking businesses will, over time, account for no more than 25% of the group's risk weighted assets," the Chairman said.
He said that UBS needed to review everything before making any announcements about jobs and cost cuts. But the company said that the deal should generate annual run-rate reductions of more than $8 billion by 2027.
No Leverage
Credit Suisse had around 50,000 employees worldwide at the end of 2022, including 16,000 in Switzerland. UBS, for its part, employs approximately 74,000 people globally.
It is unclear how the antitrust authorities will react to this merger around the world, since the two banks are considered systemic, i.e. important for the stability of the global financial system.
"This deal is announced; this deal will be executed successfully," Kelleher said. "We will update you regularly."
The price is well below Credit Suisse's market value of 7.4 billion Swiss francs ($8 billion) at the close of the Zurich exchange on Friday March 17. The bank, however, went into the talks from a weak position. Credit Suisse recorded some 10 billion Swiss francs in outflows in one week.
Its Credit Default Swap spreads jumped to new records this week. A Credit Default Swap (CDS) is a form of insurance for bondholders. When the cost of a CDS rises, it means that investors lose confidence that the company will be able to honor its debts.
