{"title":"瑞士银行与瑞士信贷合并:Helvetia的礼物","authors":"Pascal Böni, Tim A. Kroencke, Florin P. Vasvari","doi":"10.1111/jacf.12674","DOIUrl":null,"url":null,"abstract":"<p>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.</p><p>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</p><p>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.</p><p>To reach this conclusion, we undertake three steps. First, we quantify the wealth effects for the <i>stockholders and bondholders</i> 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.</p><p>We estimate <i>stockholder wealth effects</i> 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.</p><p>Next, we examine <i>bondholder wealth effects</i> 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 4 bp during the same period. The large abnormal CDS spread changes indicate that CS bondholders experienced significant abnormal returns since CDS spreads are sensitive to credit events and are closely related to yield spreads.11</p><p>To estimate bondholder wealth effects more accurately in USD, we utilize daily bond data for 57 CS bonds, which account for approximately 80% of CS's long-term debt. The 2-day CAR for the (observable) value-weighted CS bond portfolio amounts to an impressive +34.74%. In absolute values, relative to the market value of the target's bond portfolio as of March 17, 2023, these abnormal returns correspond to a significant and economically important value-weighted bondholder wealth increase of 22.65 bn USD. At the same time, we find no wealth increase for UBS bondholders. Accounting for the net AT1-bond wealth changes (−3.9 bn USD), these findings suggest a total wealth increase of 18.75 bn USD for CS's bondholders.</p><p>Therefore, considering the calculated total stockholder and bondholder wealth effects outlined above, the combined wealth increase amounts to 19.5 bn USD (0.79 bn USD net stockholder effects plus 18.75 bn USD net bondholder effects). This can be interpreted as the net market value created by the state orchestrated bailout-merger deal. The entire net wealth effect appears to be exogenous, not attributable to any wealth transfers from bondholders to stockholders within or across the merging banks.</p><p>Could CS have been rescued at a lower cost? We posit that allowing for competitive bidding for CS's equity would have likely resulted in a lower price for its rescue. While it is challenging to establish this quantitatively, we draw on comprehensive academic research on competitive merger bids to support this contention. First, prior literature finds negative stockholder abnormal returns for non-failed bank acquisitions12 and modest positive CARs for failed-bank acquisitions.13 These modest CARs are primarily attributed to bidder restrictions.14 In competitive bidding scenarios, the winning bidder often overpays, leading to more favorable terms of the target's shareholders. Therefore, drawing on the winner's curse hypothesis of Richard Roll15 and existing literature, we argue that bidder restrictions likely resulted in a wealth transfer from CS to UBS stockholders.</p><p>Second, the literature suggests that the wealth transfer to CS bondholders may be attributed to a coinsurance effect.16 With the merger announcement, the market anticipated a substantial decrease in CS's leverage and probability of default. It is evident that an unexpected decrease in firm leverage can lead to wealth transfers from stockholders to bondholders.17 This coinsurance effect is particularly pronounced when the target's rating is lower than the acquirer's or when the acquisition is expected to reduce the target's risk.18 Both conditions were present in this merger, which supports the existence of large abnormal returns. However, the significant wealth gain of almost 18.75 bn USD for CS bondholders, combined with no change in the value of UBS bonds, suggests that this mechanism alone cannot fully explain the observed effects.</p><p>A third additional factor at play may be the “too-big-to-fail” channel whereby the new bank likely benefits from reinforced gains associated with its “too-big-to-fail” status.19 An important element of this takeover was the loss protection agreement signed by UBS with the Federal Department of Finance (FDF). This agreement covered a specific portfolio of Credit Suisse assets, which corresponded to approximately 3% of the combined assets of the merged bank. UBS could draw the guarantee for any realized losses exceeding CHF 5 bn from the federal government (up to a maximum of CHF 14 bn). Only losses realized could be covered by this guarantee. In support for this channel, we find that the government intervention resulted in a significant jump in Switzerland's cost of debt, ultimately placing a burden on taxpayers. Consistent with the prior literature on the cost of government interventions the event caused a substantial increase in Switzerland's sovereign credit risk and, consequently, its expected cost of capital.20 Switzerland's sovereign credit risk, as proxied by its CDS spread, more than doubled. The present value of the associated expected increase in capital costs, amounts to approximately 5.8–7.2 bn USD.</p><p>We thus conclude that the substantial combined net wealth increase of 19.5 bn USD, unexplained by abnormal security returns, ultimately falls on the shoulders of taxpayers. Both, the loss protection agreement mentioned above but also the observed jump in Switzerland's cost of debt do support this interpretation. A poorly managed bank is kept afloat, and an incentive for large banks to take excessive risks and lower their efforts to manage risks is heightened. While these costs may be outweighed by benefits such reducing the likelihood of a financial panic, achieving these benefits at a lower cost should have been the primary goal. This could have been accomplished through the avoidance of bidder restrictions and effective bank oversight that utilizes existing market signals in a timely manner to facilitate an orderly bank resolution.</p><p>The subsequent sections of the paper proceed as follows. Section 2 provides a description of the events leading up to the UBS/CS bailout-merger, Section 3 outlines the data and event study methodology used, Section 4 presents the empirical results along with robustness tests, Section 5 discusses the findings, and Section 6 concludes the paper.</p><p>To facilitate the bailout-merger, the Federal Council enacted emergency measures based on articles 184 and 185 of the Federal Constitution. These measures included the creation of a legal framework allowing the national bank to provide additional liquidity assistance beyond standard emergency liquidity assistance. The Federal Council also provided a default guarantee to the SNB. The Finance Delegation, representing the federal government and driven by the Federal Council), granted a 9 bn Swiss franc guarantee to cover potential losses arising from specific assets UBS acquired as part of the transaction.35 UBS was responsible for the first CHF 5 bn of any realized losses associated with winding down inherited Credit Suisse assets that were deemed non-core or incompatible with its risk profile. If losses exceed this amount, the federal government has committed to cover up to a maximum of CHF 9 bn. This Swiss federal guarantee obliged UBS to manage the assets in such a way that losses are minimized (and realization proceeds are maximized) and the federal government received broad information and audit rights in order to verify this. Furthermore, CS and UBS received a total of 200 bn Swiss francs in additional liquidity assistance loans from the Swiss National Bank, comprising a 100 bn Swiss franc loan with privileged creditor status in bankruptcy and a loan of up to 100 bn Swiss francs backed by a federal default guarantee.36 As of the end of May 2023, Credit Suisse had repaid its outstanding liquidity amounts received in full to the Swiss National Bank.</p><p>Almost a month later, on May 16, 2023, UBS disclosed potential costs and benefits amounting to tens of bns of dollars from its takeover of CS, highlighting the significant stakes involved in completing the rescue of its struggling Swiss rival. UBS estimated a negative impact of $13 bn from fair value adjustments and $4 bn in potential litigation and regulatory costs resulting from outflows. Additionally, the switch in accounting standards brought the total hit to $28.3 bn. However, UBS expected to offset these costs with a write-down of $17.1 bn from Credit Suisse's AT1 bonds as well as taking over CS for a fraction of its book value, resulting in a one-off gain of $34.8 bn from the acquisition.</p><p>While the disclosure of the accounting gain was seen as less favorable than expected, it did offer UBS a cushion to absorb losses and costs associated with the merger and was likely to contribute to a boost in UBS's future profits if the transaction proceeded as planned. The numbers underscored CS's frailty and the integration challenges that UBS faced. UBS has imposed several restrictions on Credit Suisse during the takeover, including limits on lending, spending, and contract sizes. These measures were seen as reasonable given the lapses in CS's risk controls, although they could cause certain clients to leave the bank.</p><p>On June 12, 2023, UBS successfully finalized its emergency acquisition of CS, thereby establishing a colossal Swiss banking institution with a balance sheet of $1.6 trillion and a robust foothold in wealth management. In tandem with this announcement, UBS revealed that CS will operate as a separate subsidiary. Additionally, CS's bankers will be prohibited from acquiring new clients from high-risk countries or investing in complex financial products. These preventative measures, formulated by UBS's compliance department, aimed to mitigate potential risks associated with the transaction.</p><p>We show that the UBS-CS-merger substantially impacted the wealth of the participating firms’ stockholders and bondholders. It created a net value of 19.5 bn USD, distributed to UBS stockholders (5.1 bn USD), CS stockholders (−4.4 bn USD), and CS bondholders (18.8 bn USD). The combined wealth effect cannot be explained by the participating firms’ abnormal returns on securities. While the Swiss government claims that the bailout-merger is a private transaction that has the potential to come at zero cost to the taxpayer, we find that there have likely been large transfers of wealth from taxpayers to UBS/CS stakeholders.</p><p>We identify various channels that may have created this surprisingly large, combined wealth effect. First, we argue that UBS stockholders have profited from bidding restrictions imposed by the government. These bidding restrictions may be the result of political ties between the government and top-level representatives of UBS and CS, who engaged in meetings to discuss the potential merger and other contingency plans as early as in December 2022. Second, we believe that CS bondholders profited from substantial coinsurance effects. Third, the “too-big-to-fail” channel, combined with a material loss protection agreement which covered a specific portfolio of CS assets (corresponding to approximately 3% of the combined assets of the merged bank) may have contributed to the combined wealth effect. Finally, and importantly, we infer from our analysis that the government intervention likely came at the cost of a significant jump in Switzerland's sovereign credit risk and thus an increase in its expected cost of debt, implying the risk of a substantial taxpayer wealth transfer in the magnitude of approximately six to seven bn USD.</p><p>It seems that the reforms adopted after the 2007–2009 crisis still fall short in resolving issues with systemically important bank institutions. Staggering costs of extensive government intervention in a banking crisis, as described by Veronesi and Zingales for the US financial sector during the 2008 global financial crisis, seem to be inherent in the banking system.70 As in the GFC, and described in more detail by Anjan Thakor in 2015,71 taxpayers and private investors still appear to bear the bailout costs for failing banks. Authorities act late, apply corrections only after the risks of failure have become severe. Both the failure of bank executives and the deficit of supervisors to anticipate necessary tasks in case of an intervention (such as avoiding unnecessary restrictions on bidder participation) have created costly inefficiencies in the bailout process, including substantial wealth transfers from taxpayers to the banking sector. Restoring confidence to the financial system should have been achieved at a lower cost.</p>","PeriodicalId":46789,"journal":{"name":"Journal of Applied Corporate Finance","volume":"37 2","pages":"104-121"},"PeriodicalIF":1.4000,"publicationDate":"2025-07-06","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"https://onlinelibrary.wiley.com/doi/epdf/10.1111/jacf.12674","citationCount":"0","resultStr":"{\"title\":\"The UBS-Credit Suisse Merger: Helvetia's Gift\",\"authors\":\"Pascal Böni, Tim A. Kroencke, Florin P. Vasvari\",\"doi\":\"10.1111/jacf.12674\",\"DOIUrl\":null,\"url\":null,\"abstract\":\"<p>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.</p><p>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</p><p>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.</p><p>To reach this conclusion, we undertake three steps. First, we quantify the wealth effects for the <i>stockholders and bondholders</i> 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.</p><p>We estimate <i>stockholder wealth effects</i> 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.</p><p>Next, we examine <i>bondholder wealth effects</i> 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 4 bp during the same period. The large abnormal CDS spread changes indicate that CS bondholders experienced significant abnormal returns since CDS spreads are sensitive to credit events and are closely related to yield spreads.11</p><p>To estimate bondholder wealth effects more accurately in USD, we utilize daily bond data for 57 CS bonds, which account for approximately 80% of CS's long-term debt. The 2-day CAR for the (observable) value-weighted CS bond portfolio amounts to an impressive +34.74%. In absolute values, relative to the market value of the target's bond portfolio as of March 17, 2023, these abnormal returns correspond to a significant and economically important value-weighted bondholder wealth increase of 22.65 bn USD. At the same time, we find no wealth increase for UBS bondholders. Accounting for the net AT1-bond wealth changes (−3.9 bn USD), these findings suggest a total wealth increase of 18.75 bn USD for CS's bondholders.</p><p>Therefore, considering the calculated total stockholder and bondholder wealth effects outlined above, the combined wealth increase amounts to 19.5 bn USD (0.79 bn USD net stockholder effects plus 18.75 bn USD net bondholder effects). This can be interpreted as the net market value created by the state orchestrated bailout-merger deal. The entire net wealth effect appears to be exogenous, not attributable to any wealth transfers from bondholders to stockholders within or across the merging banks.</p><p>Could CS have been rescued at a lower cost? We posit that allowing for competitive bidding for CS's equity would have likely resulted in a lower price for its rescue. While it is challenging to establish this quantitatively, we draw on comprehensive academic research on competitive merger bids to support this contention. First, prior literature finds negative stockholder abnormal returns for non-failed bank acquisitions12 and modest positive CARs for failed-bank acquisitions.13 These modest CARs are primarily attributed to bidder restrictions.14 In competitive bidding scenarios, the winning bidder often overpays, leading to more favorable terms of the target's shareholders. Therefore, drawing on the winner's curse hypothesis of Richard Roll15 and existing literature, we argue that bidder restrictions likely resulted in a wealth transfer from CS to UBS stockholders.</p><p>Second, the literature suggests that the wealth transfer to CS bondholders may be attributed to a coinsurance effect.16 With the merger announcement, the market anticipated a substantial decrease in CS's leverage and probability of default. It is evident that an unexpected decrease in firm leverage can lead to wealth transfers from stockholders to bondholders.17 This coinsurance effect is particularly pronounced when the target's rating is lower than the acquirer's or when the acquisition is expected to reduce the target's risk.18 Both conditions were present in this merger, which supports the existence of large abnormal returns. However, the significant wealth gain of almost 18.75 bn USD for CS bondholders, combined with no change in the value of UBS bonds, suggests that this mechanism alone cannot fully explain the observed effects.</p><p>A third additional factor at play may be the “too-big-to-fail” channel whereby the new bank likely benefits from reinforced gains associated with its “too-big-to-fail” status.19 An important element of this takeover was the loss protection agreement signed by UBS with the Federal Department of Finance (FDF). This agreement covered a specific portfolio of Credit Suisse assets, which corresponded to approximately 3% of the combined assets of the merged bank. UBS could draw the guarantee for any realized losses exceeding CHF 5 bn from the federal government (up to a maximum of CHF 14 bn). Only losses realized could be covered by this guarantee. In support for this channel, we find that the government intervention resulted in a significant jump in Switzerland's cost of debt, ultimately placing a burden on taxpayers. Consistent with the prior literature on the cost of government interventions the event caused a substantial increase in Switzerland's sovereign credit risk and, consequently, its expected cost of capital.20 Switzerland's sovereign credit risk, as proxied by its CDS spread, more than doubled. The present value of the associated expected increase in capital costs, amounts to approximately 5.8–7.2 bn USD.</p><p>We thus conclude that the substantial combined net wealth increase of 19.5 bn USD, unexplained by abnormal security returns, ultimately falls on the shoulders of taxpayers. Both, the loss protection agreement mentioned above but also the observed jump in Switzerland's cost of debt do support this interpretation. A poorly managed bank is kept afloat, and an incentive for large banks to take excessive risks and lower their efforts to manage risks is heightened. While these costs may be outweighed by benefits such reducing the likelihood of a financial panic, achieving these benefits at a lower cost should have been the primary goal. This could have been accomplished through the avoidance of bidder restrictions and effective bank oversight that utilizes existing market signals in a timely manner to facilitate an orderly bank resolution.</p><p>The subsequent sections of the paper proceed as follows. Section 2 provides a description of the events leading up to the UBS/CS bailout-merger, Section 3 outlines the data and event study methodology used, Section 4 presents the empirical results along with robustness tests, Section 5 discusses the findings, and Section 6 concludes the paper.</p><p>To facilitate the bailout-merger, the Federal Council enacted emergency measures based on articles 184 and 185 of the Federal Constitution. These measures included the creation of a legal framework allowing the national bank to provide additional liquidity assistance beyond standard emergency liquidity assistance. The Federal Council also provided a default guarantee to the SNB. The Finance Delegation, representing the federal government and driven by the Federal Council), granted a 9 bn Swiss franc guarantee to cover potential losses arising from specific assets UBS acquired as part of the transaction.35 UBS was responsible for the first CHF 5 bn of any realized losses associated with winding down inherited Credit Suisse assets that were deemed non-core or incompatible with its risk profile. If losses exceed this amount, the federal government has committed to cover up to a maximum of CHF 9 bn. This Swiss federal guarantee obliged UBS to manage the assets in such a way that losses are minimized (and realization proceeds are maximized) and the federal government received broad information and audit rights in order to verify this. Furthermore, CS and UBS received a total of 200 bn Swiss francs in additional liquidity assistance loans from the Swiss National Bank, comprising a 100 bn Swiss franc loan with privileged creditor status in bankruptcy and a loan of up to 100 bn Swiss francs backed by a federal default guarantee.36 As of the end of May 2023, Credit Suisse had repaid its outstanding liquidity amounts received in full to the Swiss National Bank.</p><p>Almost a month later, on May 16, 2023, UBS disclosed potential costs and benefits amounting to tens of bns of dollars from its takeover of CS, highlighting the significant stakes involved in completing the rescue of its struggling Swiss rival. UBS estimated a negative impact of $13 bn from fair value adjustments and $4 bn in potential litigation and regulatory costs resulting from outflows. Additionally, the switch in accounting standards brought the total hit to $28.3 bn. However, UBS expected to offset these costs with a write-down of $17.1 bn from Credit Suisse's AT1 bonds as well as taking over CS for a fraction of its book value, resulting in a one-off gain of $34.8 bn from the acquisition.</p><p>While the disclosure of the accounting gain was seen as less favorable than expected, it did offer UBS a cushion to absorb losses and costs associated with the merger and was likely to contribute to a boost in UBS's future profits if the transaction proceeded as planned. The numbers underscored CS's frailty and the integration challenges that UBS faced. UBS has imposed several restrictions on Credit Suisse during the takeover, including limits on lending, spending, and contract sizes. These measures were seen as reasonable given the lapses in CS's risk controls, although they could cause certain clients to leave the bank.</p><p>On June 12, 2023, UBS successfully finalized its emergency acquisition of CS, thereby establishing a colossal Swiss banking institution with a balance sheet of $1.6 trillion and a robust foothold in wealth management. In tandem with this announcement, UBS revealed that CS will operate as a separate subsidiary. Additionally, CS's bankers will be prohibited from acquiring new clients from high-risk countries or investing in complex financial products. These preventative measures, formulated by UBS's compliance department, aimed to mitigate potential risks associated with the transaction.</p><p>We show that the UBS-CS-merger substantially impacted the wealth of the participating firms’ stockholders and bondholders. It created a net value of 19.5 bn USD, distributed to UBS stockholders (5.1 bn USD), CS stockholders (−4.4 bn USD), and CS bondholders (18.8 bn USD). The combined wealth effect cannot be explained by the participating firms’ abnormal returns on securities. While the Swiss government claims that the bailout-merger is a private transaction that has the potential to come at zero cost to the taxpayer, we find that there have likely been large transfers of wealth from taxpayers to UBS/CS stakeholders.</p><p>We identify various channels that may have created this surprisingly large, combined wealth effect. First, we argue that UBS stockholders have profited from bidding restrictions imposed by the government. These bidding restrictions may be the result of political ties between the government and top-level representatives of UBS and CS, who engaged in meetings to discuss the potential merger and other contingency plans as early as in December 2022. Second, we believe that CS bondholders profited from substantial coinsurance effects. Third, the “too-big-to-fail” channel, combined with a material loss protection agreement which covered a specific portfolio of CS assets (corresponding to approximately 3% of the combined assets of the merged bank) may have contributed to the combined wealth effect. Finally, and importantly, we infer from our analysis that the government intervention likely came at the cost of a significant jump in Switzerland's sovereign credit risk and thus an increase in its expected cost of debt, implying the risk of a substantial taxpayer wealth transfer in the magnitude of approximately six to seven bn USD.</p><p>It seems that the reforms adopted after the 2007–2009 crisis still fall short in resolving issues with systemically important bank institutions. Staggering costs of extensive government intervention in a banking crisis, as described by Veronesi and Zingales for the US financial sector during the 2008 global financial crisis, seem to be inherent in the banking system.70 As in the GFC, and described in more detail by Anjan Thakor in 2015,71 taxpayers and private investors still appear to bear the bailout costs for failing banks. Authorities act late, apply corrections only after the risks of failure have become severe. Both the failure of bank executives and the deficit of supervisors to anticipate necessary tasks in case of an intervention (such as avoiding unnecessary restrictions on bidder participation) have created costly inefficiencies in the bailout process, including substantial wealth transfers from taxpayers to the banking sector. Restoring confidence to the financial system should have been achieved at a lower cost.</p>\",\"PeriodicalId\":46789,\"journal\":{\"name\":\"Journal of Applied Corporate Finance\",\"volume\":\"37 2\",\"pages\":\"104-121\"},\"PeriodicalIF\":1.4000,\"publicationDate\":\"2025-07-06\",\"publicationTypes\":\"Journal Article\",\"fieldsOfStudy\":null,\"isOpenAccess\":false,\"openAccessPdf\":\"https://onlinelibrary.wiley.com/doi/epdf/10.1111/jacf.12674\",\"citationCount\":\"0\",\"resultStr\":null,\"platform\":\"Semanticscholar\",\"paperid\":null,\"PeriodicalName\":\"Journal of Applied Corporate Finance\",\"FirstCategoryId\":\"1085\",\"ListUrlMain\":\"https://onlinelibrary.wiley.com/doi/10.1111/jacf.12674\",\"RegionNum\":0,\"RegionCategory\":null,\"ArticlePicture\":[],\"TitleCN\":null,\"AbstractTextCN\":null,\"PMCID\":null,\"EPubDate\":\"\",\"PubModel\":\"\",\"JCR\":\"Q4\",\"JCRName\":\"BUSINESS, FINANCE\",\"Score\":null,\"Total\":0}","platform":"Semanticscholar","paperid":null,"PeriodicalName":"Journal of Applied Corporate Finance","FirstCategoryId":"1085","ListUrlMain":"https://onlinelibrary.wiley.com/doi/10.1111/jacf.12674","RegionNum":0,"RegionCategory":null,"ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":null,"EPubDate":"","PubModel":"","JCR":"Q4","JCRName":"BUSINESS, FINANCE","Score":null,"Total":0}
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 4 bp during the same period. The large abnormal CDS spread changes indicate that CS bondholders experienced significant abnormal returns since CDS spreads are sensitive to credit events and are closely related to yield spreads.11
To estimate bondholder wealth effects more accurately in USD, we utilize daily bond data for 57 CS bonds, which account for approximately 80% of CS's long-term debt. The 2-day CAR for the (observable) value-weighted CS bond portfolio amounts to an impressive +34.74%. In absolute values, relative to the market value of the target's bond portfolio as of March 17, 2023, these abnormal returns correspond to a significant and economically important value-weighted bondholder wealth increase of 22.65 bn USD. At the same time, we find no wealth increase for UBS bondholders. Accounting for the net AT1-bond wealth changes (−3.9 bn USD), these findings suggest a total wealth increase of 18.75 bn USD for CS's bondholders.
Therefore, considering the calculated total stockholder and bondholder wealth effects outlined above, the combined wealth increase amounts to 19.5 bn USD (0.79 bn USD net stockholder effects plus 18.75 bn USD net bondholder effects). This can be interpreted as the net market value created by the state orchestrated bailout-merger deal. The entire net wealth effect appears to be exogenous, not attributable to any wealth transfers from bondholders to stockholders within or across the merging banks.
Could CS have been rescued at a lower cost? We posit that allowing for competitive bidding for CS's equity would have likely resulted in a lower price for its rescue. While it is challenging to establish this quantitatively, we draw on comprehensive academic research on competitive merger bids to support this contention. First, prior literature finds negative stockholder abnormal returns for non-failed bank acquisitions12 and modest positive CARs for failed-bank acquisitions.13 These modest CARs are primarily attributed to bidder restrictions.14 In competitive bidding scenarios, the winning bidder often overpays, leading to more favorable terms of the target's shareholders. Therefore, drawing on the winner's curse hypothesis of Richard Roll15 and existing literature, we argue that bidder restrictions likely resulted in a wealth transfer from CS to UBS stockholders.
Second, the literature suggests that the wealth transfer to CS bondholders may be attributed to a coinsurance effect.16 With the merger announcement, the market anticipated a substantial decrease in CS's leverage and probability of default. It is evident that an unexpected decrease in firm leverage can lead to wealth transfers from stockholders to bondholders.17 This coinsurance effect is particularly pronounced when the target's rating is lower than the acquirer's or when the acquisition is expected to reduce the target's risk.18 Both conditions were present in this merger, which supports the existence of large abnormal returns. However, the significant wealth gain of almost 18.75 bn USD for CS bondholders, combined with no change in the value of UBS bonds, suggests that this mechanism alone cannot fully explain the observed effects.
A third additional factor at play may be the “too-big-to-fail” channel whereby the new bank likely benefits from reinforced gains associated with its “too-big-to-fail” status.19 An important element of this takeover was the loss protection agreement signed by UBS with the Federal Department of Finance (FDF). This agreement covered a specific portfolio of Credit Suisse assets, which corresponded to approximately 3% of the combined assets of the merged bank. UBS could draw the guarantee for any realized losses exceeding CHF 5 bn from the federal government (up to a maximum of CHF 14 bn). Only losses realized could be covered by this guarantee. In support for this channel, we find that the government intervention resulted in a significant jump in Switzerland's cost of debt, ultimately placing a burden on taxpayers. Consistent with the prior literature on the cost of government interventions the event caused a substantial increase in Switzerland's sovereign credit risk and, consequently, its expected cost of capital.20 Switzerland's sovereign credit risk, as proxied by its CDS spread, more than doubled. The present value of the associated expected increase in capital costs, amounts to approximately 5.8–7.2 bn USD.
We thus conclude that the substantial combined net wealth increase of 19.5 bn USD, unexplained by abnormal security returns, ultimately falls on the shoulders of taxpayers. Both, the loss protection agreement mentioned above but also the observed jump in Switzerland's cost of debt do support this interpretation. A poorly managed bank is kept afloat, and an incentive for large banks to take excessive risks and lower their efforts to manage risks is heightened. While these costs may be outweighed by benefits such reducing the likelihood of a financial panic, achieving these benefits at a lower cost should have been the primary goal. This could have been accomplished through the avoidance of bidder restrictions and effective bank oversight that utilizes existing market signals in a timely manner to facilitate an orderly bank resolution.
The subsequent sections of the paper proceed as follows. Section 2 provides a description of the events leading up to the UBS/CS bailout-merger, Section 3 outlines the data and event study methodology used, Section 4 presents the empirical results along with robustness tests, Section 5 discusses the findings, and Section 6 concludes the paper.
To facilitate the bailout-merger, the Federal Council enacted emergency measures based on articles 184 and 185 of the Federal Constitution. These measures included the creation of a legal framework allowing the national bank to provide additional liquidity assistance beyond standard emergency liquidity assistance. The Federal Council also provided a default guarantee to the SNB. The Finance Delegation, representing the federal government and driven by the Federal Council), granted a 9 bn Swiss franc guarantee to cover potential losses arising from specific assets UBS acquired as part of the transaction.35 UBS was responsible for the first CHF 5 bn of any realized losses associated with winding down inherited Credit Suisse assets that were deemed non-core or incompatible with its risk profile. If losses exceed this amount, the federal government has committed to cover up to a maximum of CHF 9 bn. This Swiss federal guarantee obliged UBS to manage the assets in such a way that losses are minimized (and realization proceeds are maximized) and the federal government received broad information and audit rights in order to verify this. Furthermore, CS and UBS received a total of 200 bn Swiss francs in additional liquidity assistance loans from the Swiss National Bank, comprising a 100 bn Swiss franc loan with privileged creditor status in bankruptcy and a loan of up to 100 bn Swiss francs backed by a federal default guarantee.36 As of the end of May 2023, Credit Suisse had repaid its outstanding liquidity amounts received in full to the Swiss National Bank.
Almost a month later, on May 16, 2023, UBS disclosed potential costs and benefits amounting to tens of bns of dollars from its takeover of CS, highlighting the significant stakes involved in completing the rescue of its struggling Swiss rival. UBS estimated a negative impact of $13 bn from fair value adjustments and $4 bn in potential litigation and regulatory costs resulting from outflows. Additionally, the switch in accounting standards brought the total hit to $28.3 bn. However, UBS expected to offset these costs with a write-down of $17.1 bn from Credit Suisse's AT1 bonds as well as taking over CS for a fraction of its book value, resulting in a one-off gain of $34.8 bn from the acquisition.
While the disclosure of the accounting gain was seen as less favorable than expected, it did offer UBS a cushion to absorb losses and costs associated with the merger and was likely to contribute to a boost in UBS's future profits if the transaction proceeded as planned. The numbers underscored CS's frailty and the integration challenges that UBS faced. UBS has imposed several restrictions on Credit Suisse during the takeover, including limits on lending, spending, and contract sizes. These measures were seen as reasonable given the lapses in CS's risk controls, although they could cause certain clients to leave the bank.
On June 12, 2023, UBS successfully finalized its emergency acquisition of CS, thereby establishing a colossal Swiss banking institution with a balance sheet of $1.6 trillion and a robust foothold in wealth management. In tandem with this announcement, UBS revealed that CS will operate as a separate subsidiary. Additionally, CS's bankers will be prohibited from acquiring new clients from high-risk countries or investing in complex financial products. These preventative measures, formulated by UBS's compliance department, aimed to mitigate potential risks associated with the transaction.
We show that the UBS-CS-merger substantially impacted the wealth of the participating firms’ stockholders and bondholders. It created a net value of 19.5 bn USD, distributed to UBS stockholders (5.1 bn USD), CS stockholders (−4.4 bn USD), and CS bondholders (18.8 bn USD). The combined wealth effect cannot be explained by the participating firms’ abnormal returns on securities. While the Swiss government claims that the bailout-merger is a private transaction that has the potential to come at zero cost to the taxpayer, we find that there have likely been large transfers of wealth from taxpayers to UBS/CS stakeholders.
We identify various channels that may have created this surprisingly large, combined wealth effect. First, we argue that UBS stockholders have profited from bidding restrictions imposed by the government. These bidding restrictions may be the result of political ties between the government and top-level representatives of UBS and CS, who engaged in meetings to discuss the potential merger and other contingency plans as early as in December 2022. Second, we believe that CS bondholders profited from substantial coinsurance effects. Third, the “too-big-to-fail” channel, combined with a material loss protection agreement which covered a specific portfolio of CS assets (corresponding to approximately 3% of the combined assets of the merged bank) may have contributed to the combined wealth effect. Finally, and importantly, we infer from our analysis that the government intervention likely came at the cost of a significant jump in Switzerland's sovereign credit risk and thus an increase in its expected cost of debt, implying the risk of a substantial taxpayer wealth transfer in the magnitude of approximately six to seven bn USD.
It seems that the reforms adopted after the 2007–2009 crisis still fall short in resolving issues with systemically important bank institutions. Staggering costs of extensive government intervention in a banking crisis, as described by Veronesi and Zingales for the US financial sector during the 2008 global financial crisis, seem to be inherent in the banking system.70 As in the GFC, and described in more detail by Anjan Thakor in 2015,71 taxpayers and private investors still appear to bear the bailout costs for failing banks. Authorities act late, apply corrections only after the risks of failure have become severe. Both the failure of bank executives and the deficit of supervisors to anticipate necessary tasks in case of an intervention (such as avoiding unnecessary restrictions on bidder participation) have created costly inefficiencies in the bailout process, including substantial wealth transfers from taxpayers to the banking sector. Restoring confidence to the financial system should have been achieved at a lower cost.