UBS seeks to “preserve the value left in the business while limiting downside exposure”

Over the weekend, UBS announced it would acquire beleagured bank Credit Suisse for $3.23 billion. The rescue deal has done little to quell fears of contagion risk in wider financial markets, coming so soon after the collapse of US banks SVB and Signature.

Credit Suisse has been embroiled in a series of scandals, including criticisms of its part in the collapse of Greensill Capital, with the Swiss regulator citing poor risk management controls.

But it was the decision of its biggest backer, Saudi National Bank, to refuse further financial help that sealed its fate.

UBS to the rescue

UBS Chairman Colm Kelleher said: “This acquisition is attractive for UBS shareholders but, let us be clear, as far as Credit Suisse is concerned, this is an emergency rescue. We have structured a transaction which will preserve the value left in the business while limiting our downside exposure.”

Despite quick action by UBS and the Swiss regulator to rescue the stricken bank, panic is spreading through global financial markets with central banks forced to step in and restore calm.

”Credit Suisse was on life support and Swiss authorities believed only a full transplant of the banks divisions into UBS would restore stability to the banking system. But an operation of this magnitude is a big risk for UBS – that’s why it was only willing to pay $3.23 billion, less than half the price its shares valued the bank at on Friday.

“It will not only have to accept the healthier parts of the business but its failing ones as well – particularly its investment division, which has been mired in crisis after crisis.

“UBS will now be looking to chop up and sell off big chunks of operations, to slim down in size, given that the combined balance sheet is twice the size of Switzerland’s economy.”

Too big to fail?

Unlike last week’s collapses of smaller lenders SVB and Signature, the demise of Credit Suisse involves a much larger institution of the ‘too big to fail’ variety. It is the largest failure of its kind since the Global Financial Crisis.

”The speed at which the 167-year-old institution deteriorated, when it was previously deemed too big to fail, has rocked the banking sector,” continued Streeter.

“As the shockwaves continue to ripple central banks have taken rear guard action to reduce the risks of contagion. They’ve co-ordinated currency swaps to enable the smooth flow of money around the world, to ensure financial institutions can easily tap into the dollars they need to operate.

”Investors in Asia initially welcomed the action, but fresh worries are now coming to the surface about what could happen next.”

”Bigger lenders are still considered to be much better insulated from the chill winds still blowing through the banking sector,” she added. ”… But as risk aversion grips the sector, the worry is that overall banks will become more cautious in their lending.”

Regulators under pressure

In an article in the Financial Times, Jerome Legras, managing partner at Axiom Alternative Investments, said the fall of Credit Suisse shows there is more work to be done on bank risk.

”There are many lessons to be drawn from this crisis, but my hope is that ultimately the one that will prevail is this: a bank’s culture is too important to treat it lightly,” he writes.

”…Regulators and investors have done a lot of work on this, but evidently there is still much to do.”