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UBS Acquires Credit Suisse

Mar 20, 2023

UBS is acquiring Credit Suisse despite Credit Suisse receiving a $54 billion financial lifeline from the Swiss National Bank last week to boost its liquidity.

UBS has stated that it will pay $3.2 billion for the 167-year-old flagship, while the government has stated that UBS will bear the first $5.4 billion in losses from unwinding derivatives and other risky assets.

After the investment bank's loan failed to reassure investors and customers, Swiss authorities began urging UBS to buy Credit Suisse.
Therefore, UBS is taking a significant risk with this transaction.

Credit Suisse's CS -52.68%decrease: nearly 167-year run came to an end on Sunday when its larger and long-time rival UBS Group UBS 4.31%increase; agreed to buy it, marking the largest transaction in the global banking system in years.

UBS's deal to buy Credit Suisse for around $3 billion came together quickly over the weekend, despite Credit Suisse's problems brewing for years. The Swiss lender has long been regarded as the banking system's problem child.

Regulators pushed UBS into the deal in order to alleviate further concern about the banking industry's stability.

Credit Suisse became the latest bank to experience a sharp drop in confidence last week, sending its stock and bond prices plummeting and customers rushing to withdraw their funds. According to The Wall Street Journal, the bank faced up to $10 billion in customer outflows per day last week. Regulators feared that if the bank was not dealt with, it would go bankrupt.

UBS has long been regarded as an essential component of any state-backed solution for Credit Suisse. The two banks' talks began last Wednesday and accelerated over the weekend. Finma, Switzerland's financial regulator, stated that action was required by authorities to protect Swiss and global financial markets.

  • What were the terms of the agreement?

In the all-share deal, UBS agreed to pay Credit Suisse shareholders 3 billion Swiss francs, or approximately $3.1 billion. The Swiss government also agreed to backstop 9 billion Swiss francs in potential losses from Credit Suisse assets, allowing UBS to write off approximately $17 billion in Credit Suisse bonds.

  • How did investors react to the transaction?

Investors sold European bank shares early on Monday, but they later recovered some ground. UBS's stock began to rise. However, investors abandoned "additional tier 1" (AT1) bonds across the banking sector.

  • What exactly is an AT1 bond?

AT1 bonds are bank-issued debt securities. They are a type of lending. They do, however, have a unique feature: they do not have to be repaid if a bank fails. A normal bond, of course, must be repaid.

They were very appealing to both European banks and investors: Regulators require banks to hold a certain amount of capital, which is defined as assets minus liabilities. AT1s are a type of liability, but due to their unique vanishing feature, they are not counted in that formula. This increases capital.

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