UBS reportedly seeks $6 billion in government guarantees for Credit Suisse takeover

by The Insights

UBS publishes its latest results


UBS asks the Swiss government to cover around $6 billion in costs if it were to buy Swiss credita person familiar with the talks said, as the two sides raced to strike a deal aimed at restoring confidence in the ailing Swiss bank.

Credit Suisse, 167, is the biggest name caught in the turmoil sparked by the collapse of US lenders Silicon Valley Bank and Signature Bank over the past week, sending bank stocks into a rout and prompting investors authorities to rush extraordinary measures to keep banks afloat.

The $6 billion in government guarantees sought by UBS would cover the cost of winding up parts of Credit Suisse and potential litigation costs, two people told Reuters.

One of the sources warned that talks to resolve the crisis of confidence in Credit Suisse are facing significant hurdles and that 10,000 jobs could have to be cut if the two banks team up.

Swiss regulators are rushing to present a solution for Credit Suisse before markets reopen on Monday, but the complexity of combining the two giants raises the prospect that talks will continue until Sunday, said the person, who has asked to remain anonymous due to the sensitivity of the situation.

Credit Suisse, UBS and the Swiss government declined to comment.

The frantic weekend trading comes after a brutal week for banking stocks and efforts in Europe and the United States to shore up the sector. US President Joe Biden’s administration moved to guarantee consumer deposits while the Swiss central bank lent billions to Credit Suisse to stabilize its fragile balance sheet.

UBS was under pressure from Swiss authorities to take over its local rival to bring the crisis under control, two people with knowledge of the matter said. The plan could see Credit Suisse’s Swiss operations spun off.

Switzerland is preparing to use emergency measures to speed up the deal, the Financial Times reported, citing two people familiar with the situation.

US authorities are involved, working with their Swiss counterparts to help broker a deal, Bloomberg News reported, also citing people familiar with the matter.

UK Finance Minister Jeremy Hunt and Bank of England Governor Andrew Bailey are also in regular contact over the weekend over the fate of Credit Suisse, a source familiar with the matter said. Spokespersons for the UK Treasury and the Bank of England’s Prudential Regulation Authority, which oversees lenders, declined to comment.

Energetic response

Credit Suisse shares lost a quarter of their value last week. It was forced to tap $54 billion in central bank funding as it tried to recover from a series of scandals that undermined investor and customer confidence.

The firm ranks among the largest wealth managers in the world and is considered one of the 30 global systemically important banks whose failure would affect the entire financial system.

Banking sector fundamentals are stronger and global systemic linkages are weaker than during the 2008 global financial crisis, Goldman analyst Lotfi Karoui wrote in a note to clients late Friday. This limits the risk of a “potential vicious circle of counterparty credit losses,” Karoui said.

“However, a stronger political response is probably needed to bring some stability,” Karoui said. The bank said the lack of clarity over Credit Suisse’s future will put pressure on the wider European banking sector.

A senior Chinese central bank official said on Saturday that high interest rates in major developed economies could continue to cause problems for the financial system.

There were several reports of interest in Credit Suisse from other rivals. Bloomberg reported that German Bank was studying the possibility of buying back some of its assets, while the American financial giant black rock denied a report that he was part of a competing bid for the bank.

Interest rate risk

The failure of California-based Silicon Valley Bank has highlighted how a relentless campaign of interest rate hikes by the US Federal Reserve and other central banks – including the European Central Bank this week – put pressure on the banking sector. The SVB and Signature collapses are the second and third largest bank failures in US history behind the demise of Washington Mutual during the 2008 global financial crisis.

Banking stocks around the world have been battered since the SVB collapse, with the S&P Banks index falling 22%, its biggest two weeks of losses since the pandemic rocked markets in March 2020.

Big US banks have thrown a $30 billion lifeline to small lenders First Republicand US banks have requested a total of $153 billion in emergency liquidity from the Federal Reserve in recent days.

In Washington, the focus has shifted to greater oversight to ensure banks and their executives are held accountable.

Biden called on Congress to give regulators greater power over the sector, including imposing higher fines, recovering funds and banning officials from failing banks.

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