In a historic deal that shocked the financial world, UBS Group AG announced on Sunday that it has agreed to buy Credit Suisse Group AG for 3 billion Swiss francs ($3.24 billion USD), creating a banking behemoth that would rival some of the largest global players. The deal was brokered by the Swiss authorities, who intervened to prevent a collapse of Credit Suisse amid a crisis of confidence that has threatened to spread across global markets.
What led to the deal?
Credit Suisse had been struggling for years with legal troubles, regulatory fines, strategic missteps, and poor performance. In 2022, it recorded its worst loss since the global financial crisis of 2008-2009. But its woes escalated last week after it revealed "material weakness" in its bookkeeping and faced massive losses from its exposure to two failed American banks: Silicon Valley Bank and Signature Bank.
Silicon Valley Bank and Signature Bank were among several US regional banks that collapsed earlier this month after they were unable to meet margin calls from their lenders amid a spike in interest rates and a slump in bond prices. The banks had invested heavily in risky assets such as Collateralized Loan Obligations (CLOs), which are bundles of loans to companies with low credit ratings.
Credit Suisse was one of the main underwriters and investors of CLOs, and it suffered huge losses when the value of these assets plummeted. According to some estimates, Credit Suisse could face up to $10 billion in losses from its CLO exposure.
The news triggered panic among investors, customers, and depositors, who rushed to withdraw their money from Credit Suisse. The bank's shares plunged 25% last week, wiping out more than half of its market value. Its bonds also fell sharply, raising its borrowing costs.
The Swiss National Bank (SNB) stepped in on Wednesday to provide an emergency loan of $54 billion (50 billion euros) to Credit Suisse, hoping to stabilize the situation. But this proved insufficient as confidence continued to erode.
The SNB then contacted UBS, which is Switzerland's largest bank and one of Credit Suisse's main rivals, and urged it to consider a takeover bid for Credit Suisse. The SNB also coordinated with other central banks around the world, including the US Federal Reserve and the European Central Bank (ECB), to inject liquidity into the banking system and calm market fears.
After days of frantic negotiations involving regulators from Switzerland, the US, and the UK, UBS agreed on Sunday morning to buy Credit Suisse for 3 billion francs, which is about 60% less than what Credit Suisse was worth before the crisis erupted.
How will the deal work?
The deal will be structured as an all-stock transaction, meaning that UBS will exchange its own shares for those of Credit Suisse. Credit Suisse shareholders will receive one UBS share for every 22.5 shares they own in Credit Suisse. This implies a price of 8 francs per share for Credit Suisse, which is far below its closing price of 13 francs on Friday.
The deal will not require approval from shareholders or antitrust authorities because it has been authorized by the Swiss government under an emergency law that allows it to override normal procedures in order to protect financial stability and national interests.
The Swiss government will also provide guarantees of up to 9 billion francs ($9.7 billion) to cover potential losses from some of Credit Suisse's most problematic assets, such as CLOs and litigation cases. However, these guarantees will only kick in if UBS's losses exceed 5 billion francs ($5.4 billion).
UBS said that it expects to complete the deal by June 2023 to integrate Credit Suisse's businesses into its own operations over time, achieve annual cost savings of about 4 billion francs ($4.3 billion) by combining forces with Credit Suisse, and maintain a strong capital position throughout the process.
How does it relate to forex trading and the stock market?
Those who prefer forex trading might find the acquisition important as it will prevent further market turmoil in global banking, however, it is difficult to predict with certainty which currency pairs will be most affected by this news. There are some potential ways in which the currency markets could react to this development.
For example, the Swiss franc (CHF) could be affected if the merger leads to increased consolidation in the Swiss banking sector, which could impact the stability of the Swiss financial system. In such a scenario, investors might become more risk-averse and shift their assets to other currency pairs, such as the US dollar (USD) or the euro (EUR).
Another factor that could impact currency pairs is the strength of the Swiss economy relative to other economies. If the merger leads to increased efficiency and competitiveness in the Swiss banking sector, this could benefit the Swiss economy and potentially strengthen CHF against other currencies.
As for stock trading and indices trading, the ripple effect on economic mechanics is far too complex to forecast, and other factors such as inflation and economic calendar events will overwrite any UBS influences on stocks and indices.
For now, one thing is clear. If the domino-style tumbling of banks is a precursor for recession, as many believe, large investors won’t be turning to the Swiss franc as a safe-haven currency this time, assuming current market sentiment holds.
What led to the deal?
Credit Suisse had been struggling for years with legal troubles, regulatory fines, strategic missteps, and poor performance. In 2022, it recorded its worst loss since the global financial crisis of 2008-2009. But its woes escalated last week after it revealed "material weakness" in its bookkeeping and faced massive losses from its exposure to two failed American banks: Silicon Valley Bank and Signature Bank.
Silicon Valley Bank and Signature Bank were among several US regional banks that collapsed earlier this month after they were unable to meet margin calls from their lenders amid a spike in interest rates and a slump in bond prices. The banks had invested heavily in risky assets such as Collateralized Loan Obligations (CLOs), which are bundles of loans to companies with low credit ratings.
Credit Suisse was one of the main underwriters and investors of CLOs, and it suffered huge losses when the value of these assets plummeted. According to some estimates, Credit Suisse could face up to $10 billion in losses from its CLO exposure.
The news triggered panic among investors, customers, and depositors, who rushed to withdraw their money from Credit Suisse. The bank's shares plunged 25% last week, wiping out more than half of its market value. Its bonds also fell sharply, raising its borrowing costs.
The Swiss National Bank (SNB) stepped in on Wednesday to provide an emergency loan of $54 billion (50 billion euros) to Credit Suisse, hoping to stabilize the situation. But this proved insufficient as confidence continued to erode.
The SNB then contacted UBS, which is Switzerland's largest bank and one of Credit Suisse's main rivals, and urged it to consider a takeover bid for Credit Suisse. The SNB also coordinated with other central banks around the world, including the US Federal Reserve and the European Central Bank (ECB), to inject liquidity into the banking system and calm market fears.
After days of frantic negotiations involving regulators from Switzerland, the US, and the UK, UBS agreed on Sunday morning to buy Credit Suisse for 3 billion francs, which is about 60% less than what Credit Suisse was worth before the crisis erupted.
How will the deal work?
The deal will be structured as an all-stock transaction, meaning that UBS will exchange its own shares for those of Credit Suisse. Credit Suisse shareholders will receive one UBS share for every 22.5 shares they own in Credit Suisse. This implies a price of 8 francs per share for Credit Suisse, which is far below its closing price of 13 francs on Friday.
The deal will not require approval from shareholders or antitrust authorities because it has been authorized by the Swiss government under an emergency law that allows it to override normal procedures in order to protect financial stability and national interests.
The Swiss government will also provide guarantees of up to 9 billion francs ($9.7 billion) to cover potential losses from some of Credit Suisse's most problematic assets, such as CLOs and litigation cases. However, these guarantees will only kick in if UBS's losses exceed 5 billion francs ($5.4 billion).
UBS said that it expects to complete the deal by June 2023 to integrate Credit Suisse's businesses into its own operations over time, achieve annual cost savings of about 4 billion francs ($4.3 billion) by combining forces with Credit Suisse, and maintain a strong capital position throughout the process.
How does it relate to forex trading and the stock market?
Those who prefer forex trading might find the acquisition important as it will prevent further market turmoil in global banking, however, it is difficult to predict with certainty which currency pairs will be most affected by this news. There are some potential ways in which the currency markets could react to this development.
For example, the Swiss franc (CHF) could be affected if the merger leads to increased consolidation in the Swiss banking sector, which could impact the stability of the Swiss financial system. In such a scenario, investors might become more risk-averse and shift their assets to other currency pairs, such as the US dollar (USD) or the euro (EUR).
Another factor that could impact currency pairs is the strength of the Swiss economy relative to other economies. If the merger leads to increased efficiency and competitiveness in the Swiss banking sector, this could benefit the Swiss economy and potentially strengthen CHF against other currencies.
As for stock trading and indices trading, the ripple effect on economic mechanics is far too complex to forecast, and other factors such as inflation and economic calendar events will overwrite any UBS influences on stocks and indices.
For now, one thing is clear. If the domino-style tumbling of banks is a precursor for recession, as many believe, large investors won’t be turning to the Swiss franc as a safe-haven currency this time, assuming current market sentiment holds.