Crédit Suisse: Game Over
In 167 years of existence, the Swiss bank has been able to withstand the subprime crisis, various scandals, weaknesses in profitability on some activities... but not to this deposits withdrawals that accelerated at the end of the week ($10bn on Friday according to the Financial Times) nor to the pressure of the international authorities.
An emergency rescue
In 167 years of existence, the Swiss bank has been able to withstand the subprime crisis, various scandals, weaknesses in profitability on some activities… but not to this deposits withdrawals that accelerated at the end of the week ($10bn on Friday according to the Financial Times) nor to the pressure of the international authorities.
It was necessary to act quickly to reassure the markets both in Switzerland and internationally. UBS was the natural and preferred candidate of the Swiss authorities.
The conditions of the takeover
Backed by the Swiss government, UBS is therefore buying its competitor for around CHF 3bn, based on one UBS share for 22.48 Credit Suisse shares.
To do this, exceptional measures were taken over the weekend to exclude UBS shareholders from the decision.
UBS is limiting the risks in this takeover, with the support of the Swiss State for CHF 9 billion in the event of losses related to the operation (beyond the first 5 billion borne by UBS) and a “safety net” of CHF 200 billion of liquidity.
The short-term impacts on regulatory ratios are not yet known, but the post-redemption CET1 solvency ratio is considered by UBS to be “well beyond” its internal target of 13%. However, the Swiss authorities will allow sufficient time for this integration, which should last a few years.
The consequences for investors
In this rescue operation, financed by UBS shares, Credit Suisse senior debt holders will not be impacted, since they will be transformed into UBS senior debt. Whether it is “Opco” (operational company) or “Holdco ” (holding company, considered less secure) debts.
The same is not true for holders of financial subordinated debt, known as Additional Tier 1, who see the value of their Credit Suisse shares reduced to zero and who therefore partially finance the losses related to this operation (CHF 16 billion).
Is the market reassured?
While systemic risk seems to have been avoided, the same is not true of the confidence crisis that the market is currently experiencing.
The U.S. regional banking sector, which is unregulated, is still under stress.
To this is now added the concern (and discontent) of the holders of subordinated financial debt because technically,
- Bondholders (whatever they may be) must be treated better than shareholders.
- AT1 debts can be converted or written down when the bank’s capital levels fall under regulatory constraints, which was not the case for Credit Suisse.
These two conditions were not met during this acquisition. Pending possible legal proceedings, the markets are sanctioning this decision.
Unlike the 2008 crisis, the regulatory authorities are extremely attentive and mobilized. After the extension of the deposit guarantee by the Fed, the intervention of the Swiss Financial Market Supervisory Authority (FINMA) in the takeover of Credit Suisse, the main Central Banks have set up a currency exchange system (“swaps”) aimed at reassuring the ability of banks to carry out transactions in dollars. These are all messages aimed at reassuring the markets, proving that regulations are effective and that the main players will not let systemic risk take hold.
It now remains to reassure investors about subordinated financial debt and to find a lasting solution to the deposits’ withdrawals from US commercial banks.
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Published by Groupama Asset Management – Registered office: 25 rue de la Ville l’Evêque, 75008 Paris – Website: www.groupama-am.com
Date of publication: 20 March 2023