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UBS TO ACQUIRE CREDIT SUISSE

Updated: Jun 8, 2023





Why did UBS agree to buy

Last week Credit Suisse became the latest domino to fall, sending its stock and bond prices to decline. Customers began to withdraw their funds as their confidence in the bank was steeply declining. The bank had to process 10 Billion USD worth of withdrawals last week. Regulators had to step in before the bank went insolvent. UBS has long been the perfect entity to take over its competitor.


3 Reasons Behind the Takeover




1. Lifeline Insufficient

The lifeline from the Swiss National Bank was not sufficient to stop the financial damage. The dark history of Credit Suisse is one of the main reasons why customers and investors are losing confidence in the bank.


2. Government Initiation

Desperate to prevent further financial meltdowns spread throughout the global financial system, Swiss authorities initiated a private-sector solution. Switzerland's number bank and worlds largest private bank UBS Group was the ideal candidate for this rescue mission.

Negotiations involving financial regulators from Swiss, UK & US took place prior to approaching UBS Group.

The decision was swiftly executed as the Swiss government provided this amendment so that the emergency deal can follow through.


3. Strategic Move: Benefits the Shareholders of UBS Group


The takeover reinforces UBS group's position as the world's leading wealth manager with Trillions invested in assets.



Term of the Deal

UBS agreed to pay 3 Billion Swiss Franc Credit Suisse shareholders. The Swiss government decided to backstop 9 Billion francs of potential losses from Credit Suisse assets and allowed UBS to write off 17 Billion of Credit Suisse bonds.


Investors reaction

Investors disposed of European bank shares on Monday but ended up acquiring them later. UBS stock price started to rise. A massive dump of AT1 (additional tier-1) bonds took place throughout the banking sector.


Additional Tier-1 (AT1) bond




For banks issuing AT1 bonds is a much cheaper method to increase capital than issuing stocks. Investors prefer AT1 bond yield as it is higher than conventional bond yields.




References:


Thompson, M. (2023) UBS is buying Credit Suisse in bid to halt banking crisis | CNN business, CNN. Cable News Network. Available at: https://edition.cnn.com/2023/03/19/business/credit-suisse-ubs-rescue/index.html#:~:text=%E2%80%9CUBS%20today%20announced%20the%20takeover,and%20protect%20the%20Swiss%20economy.%E2%80%9D (Accessed: March 25, 2023).


Why is credit suisse in trouble? the banking turmoil explained (2023) The Wall Street Journal. Dow Jones & Company. Available at: https://www.wsj.com/articles/why-is-credit-suisse-in-trouble-the-banking-turmoil-explained-6f8ddb5b (Accessed: March 25, 2023).




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