Sunday, March 19th, 2023, Switzerland’s largest bank bought out Credit Suisse, another titan in the Swiss and global banking industry. The Swiss government brokered the deal for $3.2 billion.
A Background on Credit Suisse and UBS
Credit Suisse was founded in 1856 to finance Switzerland’s rail network. Over the next few years, they acquired several other Swiss banks and started to open up branches all across the country. Over time it became one of the largest banks nationwide and provided services to several other countries.
UBS was first established as Bank Ragazzi and, over the years, acquired and merged with several other banks to become a monumental financial institution. UBS is mainly known for its wealth and asset management and investment banking for corporate, private, and institutional clients.
Both institutions played enormous roles for banking customers in Switzerland and worldwide. Although once rivals, UBS will now acquire Credit Suisse.
What Are CoCo Bonds?
When looking into this historic buyout, you’ll hear a lot about these bonds. CoCo, or contingent convertibles, are securities banks issue to meet their regulatory capital requirements. If a bank’s capital levels fall below an established level, these bonds will be initiated into equity. Banks started issuing these types of bonds as a part of regulatory reforms during the 2008 financial crisis to reduce risks and lessen the burden that could fall on taxpayers if a bank fails.
Why Are CoCo Bonds Controversial in The Credit Suisse Buyout?
With this merger, Credit Suisse’s CoCo bonds were wiped out—which according to data from Bloomberg, was a combined $17.3 billion. This was mainly to help prevent a financial crisis that could impact global markets. Because of this wipeout and the structure of some of these bonds that Suisse Bank had in place, many investors/shareholders lost a lot of money.
What Led to The Fall of Credit Suisse Bank?
Credit Suisse has faced several challenges over the decades, and the latest collapse of Silicon Valley Bank caused the bank’s already low stocks to plummet even further. This, along with existing losses, scandals, inability to insure debt against Default, and other vulnerabilities, took away the bank’s last bit of stability before the Swiss government stepped in.
The Role of Silicon Valley Bank
The fall of SVB impacted not just Suisse Bank but the entire banking sphere. The collapse mirrored 2008 and was a reminder of the immense risks some banks are willing to take during times of inflation. Ultimately this alarm continues to echo in banking markets throughout the globe, causing investors to be wary—leading bank stocks to fall globally last week.
References:
UBS Agrees to Buy Rival Credit Suisse to Shore Up Global Market | The New York Times
Why $17 Billion in Credit Suisse ‘CoCos’ or AT1s Got Wiped Out in UBS Takeover | The Washington Post
UBS to acquire Credit Suisse: History of Switzerland’s largest bank | Explained News, The Indian Express
Reimagining the power of investing. Connecting people for a better world. | UBS Global
Contingent convertible bonds | Credit Suisse
Credit Suisse (CS) Live: Updates on UBS Deal After Banking Turmoil | Bloomberg