Fri, 09 Jun 2023

Credit Suisse bail-in by UBS expected to shore up world banking system

By Jay Jackson, Tucson News.Net
20 Mar 2023, 06:55 GMT+10

ZURICH, Switzerland - Depositors will be fully protected, shareholders will have their equity dwarfed, while bond holders will be largely wiped out by the bail-in of Credit Suisse by Switzerland's largest bank, UBS.

Credit Suisse was founded 167 years go in 1856 by industrialist Alfred Escher.

UBS on Sunday, at the urging of the Swiss federal government, the Swiss Financial Market Supervisory Authority FINMA and the Swiss National Bank, announced it would take over Credit Suisse for a fraction of its value.

Credit Suisse shareholders will receive 1 UBS share for each 22.48 Credit Suisse shares, valuing the deal at just 3 billion Swiss francs ($3.24 million), about one-third of the bank's capitalization at the close of trading on Friday.

On Friday Credit Suisse shares closed at $2.01 afterfalling 6.94 percent on the day. By Sunday those shares were worth 0.76 cents.

In an extraordinary measure, the Swiss government said it would legislate to allow the deal to proceed without shareholder approval.

"With the takeover of Credit Suisse by UBS, a solution has been found to secure financial stability and protect the Swiss economy in this exceptional situation," the Swiss National Bank said in a statement released late Sunday.

Both banks have unrestricted access to the Swiss central bank's existing facilities, through which they can obtain liquidity via the 'Guidelines on monetary policy instruments.'

"In addition, and based on the Federal Council's Emergency Ordinance, Credit Suisse and UBS can obtain a liquidity assistance loan with privileged creditor status in bankruptcy for a total amount of up to CHF 100 billion ($108 billion)," the Swiss National Bank statement said.

The (up to) 100 billion Swiss franc loan ($108 billion) will be backed by a federal default guarantee.

"The substantial provision of liquidity will ensure that both banks have access to the necessary liquidity. By providing substantial liquidity assistance, the SNB is fulfilling its mandate to contribute to the stability of the financial system, and it continues to work closely with the federal government and FINMA to this end," the Swiss central bank statement said.

A further statement by the Swiss Financial Market Supervisory Authority FINMA said the authority has approved the takeover.

"FINMA welcomes the takeover solution and the measures taken by the Swiss Confederation and the Swiss National Bank SNB. The transaction and the measures taken will ensure stability for the bank's customers and for the financial centre. The SNB is granting the bank further liquidity assistance that is backed by a default guarantee by the Swiss Confederation. This will provide sufficient liquidity to carry out the takeover," the Swiss regulator said.

"The Credit Suisse Group is experiencing a crisis of confidence, which has manifested in considerable outflows of client funds. This was intensified by the upheavals in the U.S. banking market in March 2023. There was a risk of the bank becoming illiquid, even if it remained solvent, and it was necessary for the authorities to take action in order to prevent serious damage to the Swiss and international financial markets," the statement said.

FINMA said it has been monitoring Credit Suisse intensively for several months. During this time, it acknowledged the bank had taken a number of measures to stabilise the situation. "These were not enough to restore confidence in the bank, however, and more far-reaching options were also examined. To protect depositors and the financial markets, the offer by UBS to take over Credit Suisse has proven to be the most effective solution. FINMA has therefore approved this transaction," Sunday's statement said.

For certain bondholders the takeover was initially welcomed, however in the fine print it became clear the AT1 bondholders would be wiped out. "In close coordination with FINMA, the Swiss Confederation and the SNB, UBS will take over Credit Suisse in full. The extraordinary government support will trigger a complete write-down of the nominal value of all AT1 shares of Credit Suisse in the amount of around CHF 16 billion ($17.28 billion), and thus an increase in core capital," the FINMA statement said.

The takeover will result in a larger bank, for which the current regulations require higher capital buffers. FINMA said it will grant 'appropriate transitional periods' for these to be built up.

For Credit Suisse customers, particularly its depositors, the takeover comes as a relief.

"All bank services to remain available without interruption," the FINMA statement released on Sunday said.

"On this basis, it will be possible to continue all the business activities of the banks with no restrictions or interruptions. This will ensure protection for depositors as accounts, security accounts and other services (counters, ATMs, e-banking, debit and credit cards) will likewise remain accessible as usual," the statement added.

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