On Sunday, UBS agreed to purchase Credit Suisse, its rival, for EUR 3 billion in a deal that received the backing of Swiss regulators. The purpose of the deal was to stabilize the potential banking crisis in the country.
However, when global markets opened on Monday, the deal caused them to spiral downward. Within an hour of the European market opening, the share price of Credit Suisse plummeted by over 63% before recovering slightly. Similarly, UBS’s stock prices also initially dropped by over 13% before recovering somewhat. This caused the European STOXX 600 to drop by 1.6% before recovering to some degree.
As part of the merger, the Swiss regulator ordered that Credit Suisse’s Additional Tier 1 (AT1) bonds, worth over $17 billion, be written down to zero. This move meant that holders of Credit Suisse AT1 bonds would receive nothing, while shareholders, who are usually paid after bondholders, would receive $3.23 billion. The treatment of Credit Suisse AT1 bondholders highlighted the risks of investing in this type of debt, causing AT1 bonds issued by other European banks to drop sharply on Monday.
Regulators elsewhere are attempting to minimize the damage, and the European Banking Authority, The Single Resolution Board, and the ECB Banking Supervision committee issued a joint statement.
They said:
The resolution framework implementing in the European Union the reforms recommended by the Financial Stability Board after the Great Financial Crisis has established, among others, the order according to which shareholders and creditors of a troubled bank should bear losses.
In particular, common equity instruments are the first ones to absorb losses, and only after their full use would Additional Tier One be required to be written down.
This approach has been consistently applied in past cases and will continue to guide the actions of the SRB and ECB banking supervision in crisis interventions.
Additionally, parties across the political spectrum in Switzerland also raised concerns about the vast amounts of liquidity provided by the central bank as well as government aid. Credit Suisse and UBS are expected to benefit from approximately 260 billion Swiss francs ($280 billion) in state and central bank support, which amounts to a third of the country’s gross domestic product. The aid comes in the form of 250 billion in liquidity that will be repaid, and the government will absorb up to 9 billion in losses from the deal.
However, Roger Nordmann, the leader of the Social Democrats (SP) in the Swiss lower house of parliament, warned that the support package represented an enormous risk.
He told Reuters on Monday:
The new UBS is also another massive risk – it’s going to have more than 1,500 billion francs in assets, and it’s simply too big for Switzerland.
UBS’s acquisition of Credit Suisse was supported by Swiss regulators who avoided Credit Suisse’s shareholder vote in order to have a quick resolution. Although the deal is believed to have saved the banking sector in Switzerland and in Europe, the agreed price was still lower than the closing price of Credit Suisse shares on Friday and was unfavourable towards Credit Suisse shareholders.
