how a 167-year-old banking group disappeared in five days

A year ago today, Switzerland woke up stunned by the spectacular rescue of Credit Suisse, hurriedly bought by its rival UBS for just three billion Swiss francs. A historic agreement that aimed to reestablish financial stability.

In just five days, one of the largest banking groups in the world had disappeared, erasing 167 years of history. It was a shock not only for the financial world, but also for the Swiss people, who were astonished at the rapidity of the collapse of this reference bank, created in the 19th century to finance the expansion of the country’s railways.

A rescue that was watched live all over the world, decided on a weekend and communicated on a Sunday at the end of the day. Recalling the rescue of Banco Espírito Santo in Portugal, on August 3, 2014, which put an end to a century-old bank. BES’s resolution model was not that of Credit Suisse, because there was no integration or merger with a competing bank but rather the creation of a Novobanco with a Resolution Fund to support losses on assets of up to 3.89 billion.

Returning to Credit Suisse, on March 19, 2023, the Swiss government and financial authorities organized the emergency acquisition of the bank specializing in wealth management by its rival UBS in order to avoid a global financial crisis. In the space of a year, the integration process has progressed a lot, but there is still a lot to do.

The announcement was made by the Minister of the Swiss Federal Council, Alain Berset. The official stressed that, otherwise, it would not be possible to “reestablish the confidence that has been lacking in the financial markets”. The Public Takeover Offer was, therefore, “absolutely necessary”.

The Government provided a state guarantee of nine billion Swiss francs to cover potential losses on Credit Suisse’s assets. The Swiss central bank thus guaranteed substantial liquidity to the merged bank.

The agreement provided for Credit Suisse shareholders to receive one UBS share for 22.48 Credit Suisse shares held, which equated to 0.76 euros per share. UBS agreed to assume losses of $5.4 billion from Credit Suisse, and estimated annual cost savings from the merger of around $7 billion by 2027.

The bank resulting from the merger was left with five billion dollars in assets under management, according to the president of UBS at the time, who also revealed that they would reduce Credit Suisse’s investment banking activity.

Credit Suisse “is too big to fail”, then said Thomas Jordan, president of the central bank (SNB), who pointed to the banking crisis in the United States as determining the problem of the Swiss giant in the days before the rescue.

The most controversial of the acts was the fact that the Swiss authorities decided to write off 16 billion francs in AT1 (Additional Tier 1) or CoCos bonds from Credit Suisse in the sale to UBS. These debt securities, or perpetual bonds, can be converted into equity if a bank’s capital falls below a certain percentage.

The decision to write off 16 billion Swiss francs on debt securities equivalent to equity (Additional Tier 1, AT1 or CoCos) – while shareholders managed to maintain some investment – ​​created outrage at the change in the hierarchy of creditors. as bondholders ended up losing their entire investment.

Although AT1 securities serve to absorb losses in the event of problems at a bank, these instruments only appear at a second level of a “responsibility” hierarchy and are only “called” when the capital (equity) It is used in full to clear the losses. It wasn’t like that in the Credit Suisse rescue.

To this day, Swiss authorities face investigations and a Parliamentary Commission of Inquiry that is still ongoing.

A year after the Credit Suisse rescue, the challenges for UBS continue to be immense.

In UBS’s financial report, CEO Sergio Ermotti explained that the two institutions “will operate separately until legal integration in 2024″ and that “the Credit Suisse brand and operations will continue until the gradual migration of clients to the system is completed UBS”, something that should be completed in 2025. The retail bank brand disappears by 2025. Thousands of workers are laid off.

Credit Suisse’s delisting took place on June 12, 2023. On the same day the merger was made official, and an integration process began that is expected to be completed by June.

The Organization for Economic Co-operation and Development (OECD), in a report on economic prospects for Switzerland, published on the 14th, concluded that the acquisition of Credit Suisse by UBS last year “raised new risks and challenges” to the financial stability of the country. country.

According to the report, the acquisition process was carried out in an accelerated manner, without following the regulatory process for systemically important banks, or “banks too big to fail”.

The way in which the acquisition took place, according to the OECD, “raises questions about the regulation and supervision of large banks in the future”.

According to the institution, UBS was already a systemically important bank before the acquisition of Credit Suisse, and has now reached a worrying level, while it has until 2030 to comply with global rules for systemically important banks.

Furthermore, the OECD highlights that the Swiss real estate market has now begun to show signs of weakening, and the sector’s vulnerabilities remain. As a result, large increases in interest rates or other shocks can result in sharp price corrections, leading to the deterioration of banks’ mortgage portfolios.