Crunch time for Credit Suisse talks as UBS seeks Swiss insurance

Red pedestrian crossings outside a Credit Suisse Group AG bank branch in Basel, Switzerland, Tuesday, October 25, 2022.

Stefan Wermuth | Bloomberg | Getty Images

Talk about rescue Swiss credit rolled in Sunday as UBS was seeking $6 billion from the Swiss government to cover costs should it buy its struggling rival, a person familiar with the negotiations said.

Authorities are struggling to resolve a crisis of confidence at 167-year-old Credit Suisse, the most globally significant bank caught in the turmoil spurred by the collapse of US lenders Silicon Valley Bank and Signature Bank over the past week.

While regulators want a solution before markets reopen on Monday, a source warned that talks face significant hurdles and that 10,000 jobs may have to be cut if the two banks are combined.

The guarantees UBS is seeking will cover the costs of winding up parts of Credit Suisse and potential legal costs, two people told Reuters.

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

The frantic weekend negotiations follow a brutal week for banking stocks and efforts in Europe and the US to shore up the sector. US President Joe Biden’s administration moved to freeze consumer deposits, while the Swiss National Bank lent billions to Credit Suisse to stabilize its shaky balance sheet.

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

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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 and are working with their Swiss counterparts to help broker a deal, Bloomberg News reported, also citing those familiar with the matter.

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The White House and the US Treasury Department declined to comment.

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

Strong reaction

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

It ranks among the world’s largest wealth managers and is considered one of 30 global systemically important banks – a failure of any would ripple through the entire financial system.

There were several reports of interest in Credit Suisse from other rivals. Bloomberg reported that Deutsche Bank was considering buying some of its assets, while the US financial giant Black stone denied a report that it was participating in a competing bid for the bank.

Interest rate risk

The failure of California’s Silicon Valley Bank brought into focus how a relentless campaign of interest rate hikes by the US Federal Reserve and other central banks – including the European Central Bank on Thursday – was squeezing the banking sector.

SVB and Signature’s collapse are the biggest bank failures in US history behind Washington Mutual’s demise during the 2008 global financial crisis.

First Citizens BancShares is evaluating an offer for SVB, and at least one other suitor is seriously considering an offer, Bloomberg News reported Saturday.

People walk past the Credit Suisse headquarters in New York on March 15, 2023 in New York City.

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Banking stocks globally have been hit since SVB collapsed, with the S&P Banks index down 22%, the biggest loss in two weeks since the pandemic rocked markets in March 2020.

Major US banks threw a $30 billion lifeline to smaller lenders First Republic. US banks have sought a record $153 billion in emergency liquidity from the Federal Reserve in recent days.

The Mid-Size Bank Coalition of America asked regulators to extend federal insurance to all deposits for the next two years, Bloomberg News reported Saturday, citing a letter from the coalition.

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

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Biden called on Congress to give regulators more power over the sector, including imposing higher fines, recovering funds and barring officials from failed banks.

The rapid and dramatic events could mean big banks get bigger, smaller banks may struggle to keep up, and more regional lenders may close.

“People are actually moving their money around, all these banks are going to look fundamentally different in three months, six months,” said Keith Noreika, vice president of Patomak Global Partners and a Republican former US comptroller of the currency.

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