UBS takes over Credit Suisse: Everything you need to know about the crisis

Credit Suisse crisis: Swiss government said it would provide $9 bn to help UBS meet the possible losses while taking over Credit Suisse, and Swiss National Bank will provide $100 bn of liquidity

UBS Group AG on Sunday agreed to take over its ailing rival Credit Suisse AG for $3.25 billion. The deal was reportedly brokered by Swiss regulators to halt the decline in customer confidence in the global banking system. According to a report by the Wall Street Journal (WSJ), the deal would create a banking behemoth which will account for 30 per cent of Switzerland's domestic loans and deposits.

This is the biggest bank to fall since the 2008 financial crisis. It closely follows the fall of three banks in the US that pushed the US government to take prompt decisions and stop the possible contagion.

The Swiss government said it would provide $9 billion to help UBS meet the losses it might incur while taking over Credit Suisse. Additionally, the Swiss National Bank will provide $100 billion of liquidity to UBS to facilitate the deal.

What is Credit Suisse?

Credit Suisse is a Zurich-based bank founded in 1856 to finance the expansion of Swiss railroads. Before its collapse, it was Switzerland's second-largest bank by assets, behind only UBS.

The bank had two main businesses. One was managing money, and the other was creating investment products for wealthy clients across the globe. In the last few weeks, the bank was trying to spin off its investment arm, which has been marred by a long stretch of scandals and heavy financial losses.

Why has UBS agreed to buy Credit Suisse?

UBS is the largest bank in Switzerland. It was believed that if it is not bailed out, Credit Suisse may soon become insolvent, leading to a wider crisis in the Swiss economy. It would have also impacted UBS.

The regulators were eager to curb panic, and according to WSJ, UBS has long been a part of any state-backed solution for Credit Suisse. The talks between the two banks started on Wednesday and ended over the weekend.

According to reports, the Swiss authorities were under pressure to make the deal happen before Asian markets opened on Monday. It was primarily due to Credit Suisse's falling health and its share price. On Friday alone, the shares of the bank fell 8 per cent. In the last week, its shares fell 26 per cent. WSJ reported that the bank saw withdrawal demands worth $10 billion on one day last week.

Regulators worried this would lead to contagion in the global banking system. Moreover, a regulator-led resolution would have been time-consuming.

After the deal, UBS is expected to write down Credit Suisse's AT1 bonds worth $17.3 billion.

What led to the immediate fall of Credit Suisse?

Investors, as well as regulators across the globe, have been on high alert since the fall of the Silicon Valley Bank in the US earlier this month. This led to a major sell-off of bank shares in global markets. Credit Suisse was no different. As stated, its share price fell 26 per cent in the last week. In the last month, it has fallen 32 per cent.

The problems were accentuated for Credit Suisse when on Wednesday, its largest shareholder Saudi National Bank said that it would not add any more investment due to regulatory rules. The bank currently holds 9.9 per cent of Credit Suisse, and the rules in Switzerland prevent foreign banks from holding more than 10 per cent of their stake in the domestic banks.

What happened after the sell-off?

On Wednesday alone, the Swiss regulators announced that they would provide liquidity to Credit Suisse if required. Soon, the bank announced it would use a $50 billion lifeline from the Swiss National Bank. The shares recovered on Thursday but fell again on Friday.

What were the problems with Credit Suisse?

The problems with Credit Suisse go a long way back. Some years ago, it gave money aggressively to the asset management company Archegos Capital Management. However, the company collapsed in 2021. According to reports, Credit Suisse failed to exit the deal on time and lost over $5.5 billion.

Second, the loans to the supply chain network, Greensill Capital, were also defaulted upon. The case has been going on for over five years. The bank has lost nearly $10 billion in the two cases. It exceeded the bank's current market cap of $8 billion.

Third, the bank's top leadership has seen several rejigs since 2020.

In 2020, then-CEO Tidjane Thiam was forced to quit after a spying scandal surfaced at the bank. Switzerland's financial regulator said that the bank misled it about the scale of its surveillance.

His successor Thomas Gottstein was the CEO of the bank until July 2022. Credit Suisse then chose restructuring expert Ulrich Koerner as CEO. He is the current CEO of the bank.

Former bank chairman Urs Rohner quit the office in 2021 after admitting that the bank had disappointed clients and shareholders.

His successor Antonio Horta-Osorio quit nine months later over breaking the quarantine rules during the Covid-19 pandemic. Since then, Axel Lehmann was the chairman of the bank.  

Since last year, the bank has seen high withdrawals. The bank reached out to 10,000 wealthy customers to reassure them of the bank's health. However, the deposits continued falling. In 2022, the bank recorded a net loss of 7.8 billion francs, up over four times from the 1.7 billion francs loss a year before.

How will the fall of Credit Suisse impact the banking sector?

Credit Suisse was among the most deeply integrated banks globally. It worked closely with investors and banks from various countries. The bank's collapse has led experts to believe that the central banks may pause rate hikes.

The bank stocks continue to see a sell-off globally. In India on Monday, the Nifty Bank index was down 400 points, market data showed.