The UBS‐Credit Suisse Merger: Helvetia's Gift

Pietro Veronesi and Luigi Zingales provide an account of the staggering costs of extensive government intervention in the US financial sector during the 2008 global financial crisis.1 To reduce such costs in the future, extensive regulation has been introduced to make banks more resilient, and to protect taxpayers and private investors from bearing bailout costs.2 But a key question remains: Is the post-2008 regulatory framework effective? In this paper, we analyze the UBS-Credit Suisse merger to shed light on this question. On the evening of Sunday, March 19, 2023, the Swiss Federal Council, the Swiss National Bank, and the Swiss Financial Market Supervisory Authority (Finma) jointly announced the orchestrated bailout-merger of Credit Suisse (CS) by its domestic banking rival UBS Group AG (UBS), marking the end of 167 years of proud Swiss banking history.3 The demise of CS shook faith in a stable Swiss Confederation, often affectionately called “Helvetia”.4 The bailout-merger, which aimed to restore confidence in the Swiss financial system, deviated significantly from standard bank resolution procedures. It lacked competitive bidding and circumvented a typical bank resolution or purchase and assumption (P&A) transaction, where the acquiring bank purchases the failed bank's assets and assumes its deposits. Instead, the Swiss government forced the implementation of a government emergency rescue deal, which consisted of a complete emergency merger share-deal between UBS and CS. This emergency rescue deal also included massive state liquidity guarantees in the amount of 214 billion (bn) US dollars (USD) and, additionally, a substantial loss guarantee totaling 9.63 bn USD to cover potential losses incurred on the realization of certain CS assets. We argue that the exclusion of competitive bidding, imposed by the government, and the relatively late intervention of the regulator have led to an unexpectedly favorable deal for the acquirer, UBS. We show that significant wealth transfers to specific asset owners have taken place due to the merger. While some of these wealth transfers were offset by redistributions from CS shareholders and AT1 bondholders, the ones who are supposed to bear the burden of bankruptcy, the overall wealth effect cannot be solely explained by the participating firms’ abnormal returns on securities. We provide insights into the merger-induced value creation and destruction and the redistribution of wealth amongst stakeholders and taxpayers. More specifically, we show that Switzerland's cost of debt increased substantially as a consequence of the state-orchestrated merger between UBS and CS. We conclude that an economically meaningful part of the costs is borne exogenously, that is, primarily by the taxpayer. This is what we call the “Helvetia's gift”, which suggests that the current regulatory framework does not actually protect the public from bad behavior by financial actors as much as one might hope. To reach this conclusion, we undertake three steps. First, we quantify the wealth effects for the stockholders and bondholders of UBS (acquiror) and CS (target). Second, we compare our empirical findings with insights from extant academic literature on competitive bank mergers. Third, we assess the anticipated refinancing cost of the massive liquidity and loss guarantees granted by the Swiss government. We estimate stockholder wealth effects using high-frequency intraday stock data over the period from Friday, March 17 (5:30 p.m.) to Tuesday, March 21 (5:30 p.m.). The bailout-merger resulted in a 2-day cumulative abnormal return (CAR) of 7.95% for UBS shareholders and a −55% CAR for CS shareholders, while other European banks show no significant abnormal stock returns.5 In absolute values, relative to their market capitalizations as of March 17, 2023, these abnormal returns translate to a wealth increase of 5.14 bn USD for UBS stockholders, and a wealth decrease of 4.35 bn USD for CS stockholders,6 with a disproportionate negative impact on small equity retail investors in CS, as opposed to large institutional investors.7 Therefore, we observe a positive combined stockholder wealth effect of approximately 0.79 bn USD. Next, we examine bondholder wealth effects resulting from the merger-bailout. The deal involved the write-down of AT1 bonds with a nominal value of 17 bn USD and an approximate market value of 3.9 bn USD.8 While the AT1-write-down and associated numbers have received extensive media coverage, less attention has been given to the impact of the merger on CS's and UBS's holders of straight bonds even though they had significantly higher value compared to AT1 bonds. Since bond markets are generally less liquid,9 we first analyze intraday high-frequency data from credit default swap (CDS) spreads. Price information derived from CDS spreads is based on informed price discovery by traders in a liquid market known for accurately trading credit risk.10 Our findings reveal economically substantial and statistically significant cumulative abnormal CDS spread changes (CAC) of −755 basis points (bp) for CS over the 2-day horizon. In contrast, UBS's spread decreases by an insignificant during the The large abnormal CDS spread changes that CS bondholders significant abnormal returns CDS spreads are to credit and are to To estimate bondholder wealth effects more accurately in we bond data for CS which account for approximately of CS's The 2-day CAR for the CS bond to an In absolute values, relative to the market value of the bond as of March 17, 2023, these abnormal returns to a significant and economically bondholder wealth increase of bn USD. the we no wealth increase for UBS for the wealth changes bn these findings a wealth increase of bn USD for CS's Therefore, the stockholder and bondholder wealth effects the combined wealth increase to bn USD bn USD stockholder effects bn USD bondholder This be as the market value by the state orchestrated bailout-merger The wealth effect to be not to wealth transfers from bondholders to stockholders or the CS have been a We that for competitive bidding for CS's equity have resulted in a price for its While is to this we on academic on competitive merger to this First, literature negative stockholder abnormal returns for bank and positive for are primarily to In competitive bidding the often to more favorable of the Therefore, on the of and we argue that resulted in a wealth from CS to UBS Second, the literature suggests that the wealth to CS bondholders be to a the merger the market anticipated a substantial decrease in CS's and of It is that an decrease in to wealth transfers from stockholders to This effect is the is the or the is to reduce the were in this which the of large abnormal the significant wealth of bn USD for CS bondholders, combined with no in the value of UBS suggests that this cannot the be the the bank from associated with its of this the loss by UBS with the Federal of This a specific of Credit Suisse which to approximately of the combined assets of the UBS the guarantee for losses bn from the government to a of losses be by this In for this we that the government intervention resulted in a significant in Switzerland's cost of a burden on taxpayers. with the literature on the cost of government the a substantial increase in Switzerland's credit and, its cost of Switzerland's credit as by its CDS more The value of the associated increase in to approximately bn USD. We conclude that the substantial combined wealth increase of bn by abnormal on the of taxpayers. the loss also the in Switzerland's cost of debt this bank is and an for large banks to and their to is While these costs be by such the of a financial these a cost have been the This have been the of and bank that market in a to an bank The of the as a of the to the bailout-merger, the data and the empirical with the and the The of with a in to the of CS's The bank had private to on its of wealth who had UBS. In March CS to to the of a financial in in which bn USD had been that CS had its resulting in CS in March CS's bank a loss of bn USD due to its with a US that into The primarily and CS had its In CS USD by US and for its in to bn USD to in CS had USD in to and government in In CS's of Switzerland's and from where a to CS's and In a global media and data more bank that CS had been involved in banking with and of and associated with such as and The the bank's In March a that CS CS's of USD to due to The by a CS who the of CS also to the to years in in and in In Switzerland's Federal CS and a of on of a The were CS resulting in a of Swiss In CS's and CS's a to and bn USD in a and a private of bn USD. The National CS's as a The also announced a to the banking and the the bank in In the of CS significant of over bn bn to a loss of bn for approximately of CS's In CS its in the On March 2023, CS its a call from the US and which to from and as as On March CS its in its financial and the of On March 2023, the of National Bank, with a by a they financial to Credit Suisse This to the CS. 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This bond approximately of CS's We by intraday abnormal stock returns during the which from Friday, March 2023, to Friday, March 2023, This with for abnormal returns and CDS To abnormal we and estimate the using data from the which from to March stock our the as a market and the as an we not have to an intraday or abnormal CDS Instead, we a using CDS changes from large European with the of the is not to significantly impact the of the This is due to the substantial market for CS and UBS in to other and the the to the between from Friday, March 17, to March We of standard for in our First, we the by and in their to standard that the of standard the from the We that the be higher during the period our Since we high-frequency we estimate the in the using a of to the we a of standard that account for in the and on the in the Our with the by and who have the of high-frequency data in The of our on cumulative abnormal stock returns (CAR) are in and On the UBS a significant abnormal stock return of while CS had a much abnormal return of returns were statistically significant based on using the or the period by the evening of the first trading with of approximately for UBS and CS on CS stock had a CAR of UBS stock had a CAR of The stockholder CAR to for CS and for to significant wealth are economically In absolute the CAR to stockholder wealth effects of bn USD for UBS and for CS. the large estimate over the 2-day we that in the of the is and The much based on the of the period that the for from a much and the of using high-frequency of institutional equity in CS a of based on data some the end of institutional to by to the merger a decrease in institutional to the institutional on the of March on the of and the end of We also the over the period from 2023, to the We that have increased significantly from to and March these show that institutional investors their during the of that small retail investors the We analyze high-frequency data on default swap (CDS) spreads. The cumulative abnormal CDS changes in basis are in and as the they were for CS and for UBS. the end of the first trading the CDS changes were for CS and for UBS. On CS a significant of in CDS while UBS had a of significant The 2-day CDS changes to were for CS and for UBS abnormal CDS spread changes large positive abnormal returns for CS bondholders, accurately the bondholder wealth effects in USD First, the CDS is not of the bond of CS. Second, large in the CDS that we observe are to based on the To accurately the bondholder wealth effects in we the the bond return for a CS bond This has a of bn USD of CS's and bonds. the of cumulative abnormal bond returns for Credit Suisse (CS) during the from March 2023, to March The for CDS and bond and bond The abnormal bond returns are using a with the the The the CAR which the of the of the abnormal returns over the in The the cumulative in as for the intraday The the for the based on the from the We a cumulative abnormal CS bond return of over the period from to which to an abnormal bondholder wealth increase of bn USD. This abnormal USD bond return is as the market value of the bond bonds on the evening of March 17, 2023, by the bondholder CAR bn USD bn using the are We the to and as our to assess the impact of the on asset The of stock and CDS spread changes on and that the bailout-merger by which between and shed light on the the CDS of CS a the and to from in the CDS of UBS the market on and to increase the end of the this to be as on resulting in a 2-day that economically insignificant and lacked The behavior of UBS's stock price the of the CDS from to that the stock price The of the CS on had a and insignificant impact on the CDS and equity the by National to financial had a substantial impact on CS, in a CAR of which on the The CS increased by and to on the In the of we not observe significant we observe a of basis points on which statistically significant the were no abnormal returns or abnormal CDS changes on Friday, March 17, for CS or on a or intraday the and for our of European Bank, and the cumulative abnormal stock returns (CAR) for the European the cumulative abnormal CDS spread changes as a for bondholder returns for the of The are for The data by the and In the CAR the banks and a in CAR to the merger by a of positive and negative returns in The CAR for the banks a negative value on the cumulative abnormal CDS spread in basis points bondholder to is the banks and banks significant or decreases in CDS in bondholder The abnormal CDS spread for the banks also the we not observe significant abnormal in equity or CDS returns during the for these findings that the impact of the bailout-merger to the Swiss banks and that the and market of the other banks is not by changes in and This is significant as that the in asset for the Swiss banks is to these a consequence of a in of or changes in our findings the impact of the on the Swiss banking and to stockholder In we stockholder based on the return in we the with the of the European banks and the stockholder in we the abnormal CDS by the with a The from our with of our findings and We argue that the stockholder wealth effects of the CS bailout-merger what is in the literature competitive for failed the large positive stockholder wealth effect of 7.95% in this from on bank negative abnormal returns for acquiring banks in bank In the of returns are positive significantly from to the 2-day CAR of 7.95% for UBS stockholders is more the typical abnormal returns for in Federal failed bank in the It is that UBS stockholders from the bidding imposed by and that the of in failed bank the This with that the in a of an with an value to its It that the of to one from which a rival for CS, were global banks UBS that have in an an have resulted in a higher the led to a of wealth from CS to UBS shareholders, as by the large negative abnormal stock return by CS While we are no other banks were to a for CS, suggests that have this significant value for banks that in regulatory have a higher of on more favorable the of liquidity have a in which no other were to make an for The bailout-merger place during a period of with US banks and the This liquidity the Swiss government, and to the of our to a that and not have been by the CS spreads as for bank from the financial as as a bank This also the for CS, with market the bank the spread between AT1 bond of UBS and CS to significantly from the first of the from approximately to over by the end of the in CS's CDS spreads their in that and have been to the bank or a merger In more to a for a bailout-merger with CS. is that of CS, UBS and the Swiss government in with to and a potential merger of CS and UBS as as In the a bank is on the of for the bank to such as or merger with a the the resolution to a for a CS The Swiss government of to more one into this merger-bailout. The positive bondholder wealth effects with in their based on our and, more and a significant that bonds significantly higher returns the is that of the or the is anticipated to reduce This for the merger. also the that significantly impact bondholder abnormal the effect of is to be much what we observe in the an positive return of for The or bn USD bondholder wealth increase that we to be The bond write-down some of debt in of the not be in This to as they are by intervention that equity or equity a to debt and increase its bonds the to an equity resulting in Veronesi and who the US government in the financial sector announced in a effect in the of of the value of by the government, which to to the on the evening of March 17, 2023, the of CS's bonds an approximate value of of value or an approximate 3.9 bn USD. of the write-down a we are with a bondholder wealth other to is to the asset of the banks to the bailout-merger In we provide to asset and for the The data standard and other over the such as loss coverage, loss loss and other are the to losses and their loss The on to and equity and are assess the and their to losses and are in the to and potential financial the in the that the asset of CS are generally compared to of UBS. This that CS bondholders are more to from a merger that overall asset compared to UBS bondholders, which be to the The effect that a merger in a more and asset the for bondholders and CS bondholders more significantly in this The to effect to the that certain financial large are to the of the that their have a these banks or from the government and to their and that to abnormal returns for bondholders in merger The bailout-merger between UBS and CS has resulted in the creation of a bank that the Therefore, is that CS bondholders in the Our findings that bond markets in which effect or is, We that the of and the effect the wealth effects for CS It is not to estimate the costs of the we assess by changes in the costs for the Swiss government. The government has taken some to rescue CS, and its credit have been by the and empirical between credit and bank a between the financial sector and credit and that bank from bank to the in credit during and the global financial the as in their of we CDS spreads to assess Switzerland's credit has increased due to the merger-bailout. the CDS spreads of the European CDS spreads of in with that of other European the merger-bailout. the and show relatively stable CDS spreads during the while Switzerland's CDS spread by the a significant The CDS spreads of and also to the their CDS spread changes are more the Switzerland's CDS spread basis the and which from to basis on the to the Switzerland's CDS spread from basis points to basis points and this the of the first trading the to basis points on the the period the Switzerland's CDS spread an of basis and show that be a between changes in bond spreads and CDS We estimate on an of Swiss government bonds. The is in The of Swiss government bonds increased by a significant basis points from to approximately the increase in the CDS spreads Our findings that the has had a impact on Switzerland's credit as by the significant in CDS by an abnormal approximate increase in Switzerland's bond in the amount of basis The and of the CDS spread increased market of associated with Switzerland's during and the from an increase in Switzerland's credit Switzerland's cost of To for this effect in we estimate the value of Switzerland's increased cost of We that bond is the due by the of a bond of the nominal bond in the we and the increase in the cost of debt of between and with the to 2023, is the to of the and is the of the bond in The value of the increase in the cost of debt to approximately Next, we this increase in the cost of To this we Switzerland's bond its value and the value to approximate the value by a the in on our the value of the in Switzerland's cost of debt to an approximate bn We show that the substantially the wealth of the participating firms’ stockholders and It a value of bn to UBS stockholders bn CS stockholders bn and CS bondholders bn The combined wealth effect cannot be explained by the participating firms’ abnormal returns on securities. While the Swiss government that the bailout-merger is a private that has the potential to cost to the we that have been large transfers of wealth from taxpayers to We that have this combined wealth First, we argue that UBS stockholders have from bidding imposed by the government. bidding be the of between the government and of UBS and CS, who in to the potential merger and other as as in Second, we that CS bondholders from substantial Third, the combined with a loss which a specific of CS assets to approximately of the combined assets of the have to the combined wealth and we from our that the government intervention the cost of a significant in Switzerland's credit and an increase in its cost of the of a substantial wealth in the of approximately to bn USD. It that the the in with bank costs of extensive government intervention in a banking as by Veronesi and Zingales for the US financial sector during the 2008 global financial to be in the banking in the and in more by in taxpayers and private investors to bear the bailout costs for the of have the of bank and the of to in of an intervention as on have in the bailout substantial wealth transfers from taxpayers to the banking confidence to the financial have been a abnormal stock returns are as in that the is by the abnormal stock returns are as in that the banking is by the of European banks Bank, abnormal CDS changes are as in that the is by the