Some of the world's largest central banks came together on Sunday (Mar 19) to stop a banking crisis from spreading as Swiss authorities persuaded UBS Group to buy rival Credit Suisse Group in a historic deal.
UBS will pay 3 billion Swiss francs (US$3.23 billion) for 167-year-old Credit Suisse and assume up to US$5.4 billion in losses in a deal backed by a massive Swiss guarantee and expected to close by the end of 2023.
Soon after the announcement late on Sunday, the United States Federal Reserve, European Central Bank (ECB) and other major central banks came out with statements to reassure markets that have been walloped by a banking crisis that started with the collapse of two regional US banks earlier this month.
S&P 500 futures were up 0.7 per cent in early trading, adding to earlier gains, while Nasdaq futures rose 0.6 per cent. New Zealand dipped at the open and Australian shares were set to open down. Crude futures edged lower. The safe-haven dollar lost ground against peers.
Pressure on UBS helped seal Sunday's deal.
"It's a historic day in Switzerland, and a day frankly, we hoped, would not come," UBS chair Colm Kelleher told analysts on a conference call.
"Various events over the last few weeks resulted in regulators across the world urging UBS to consider a takeover of Credit Suisse to preserve global financial stability," Kelleher said.
UBS CEO Ralph Hamers said that there were still many details to be worked through.
"I know that there must be still questions that we have not been able to answer," he said. "And I understand that and I even want to apologise for it."
In a global response not seen since the height of the COVID-19 pandemic, the Fed said that it had joined with central banks in Canada, England, Japan, the European Union and Switzerland in a coordinated action to enhance market liquidity.
The ECB vowed to support eurozone banks with loans if needed, adding that the Swiss rescue of Credit Suisse was "instrumental" for restoring calm.
"The euro area banking sector is resilient, with strong capital and liquidity positions," the ECB said. "In any case, our policy toolkit is fully equipped to provide liquidity support to the euro area financial system if needed and to preserve the smooth transmission of monetary policy."
Fed Chair Jerome Powell and US Treasury Secretary Janet Yellen welcomed the announcement by the Swiss authorities. The Bank of England also praised the Swiss.
The Swiss banking marriage follows efforts in Europe and the United States to support the sector since the collapse of US lenders Silicon Valley Bank and Signature Bank.
Some investors welcomed the weekend steps but took a cautious stance.
"Provided markets don't sniff out other lingering problems, I'd think this should be pretty positive," said Brian Jacobsen, senior investment strategist at Allspring Global Investments.
Problems remain in the US banking sector, where bank stocks remained under pressure despite a move by several large banks to deposit US$30 billion into First Republic Bank, an institution rocked by the failures of Silicon Valley and Signature Bank.
On Sunday, First Republic saw its credit ratings downgraded deeper into junk status by S&P Global, which said that the deposit infusion may not solve its liquidity problems.
Four prominent US lawmakers on banking matters said on Sunday that they would consider whether a higher federal insurance limit on bank deposits was needed.
The US Federal Deposit Insurance Corporation (FDIC), meanwhile, is planning to relaunch the sale process for Silicon Valley Bank, with the regulator seeking a potential break-up of the lender, according to people familiar with the matter.
The intervention comes after two sources told Reuters earlier on Sunday that major banks in Europe were looking to the Fed and ECB to step in with stronger signals of support to stem contagion.
The euro, the pound and the Australian dollar all rose by around 0.4 per cent against the greenback, indicating a degree of risk appetite in markets.
"Bank stocks should rally on the news, but it is premature to signal all-clear," said Michael Rosen, chief investment officer for Angeles Investments in California.
UBS' Kelleher said during a press conference that it will wind down Credit Suisse's investment bank, which has thousands of employees worldwide. UBS said it expected annual cost savings of about US$7 billion by 2027.
The Swiss central bank said Sunday's deal includes 100 billion Swiss francs in liquidity assistance for UBS and Credit Suisse.
Credit Suisse shareholders will receive 1 UBS share for every 22.48 Credit Suisse shares held, equivalent to 0.76 Swiss francs per share for a total consideration of 3 billion francs, UBS said.
Credit Suisse shares had lost a quarter of their value last week. The bank was forced to tap US$54 billion in central bank funding as it tries to recover from scandals that have undermined confidence.
Under the deal with UBS, some Credit Suisse bondholders are major losers.
The Swiss regulator decided that Credit Suisse bonds with a notional value of US$17 billion will be valued at zero, angering some of the holders of the debt who thought they would be better protected than shareholders in a rescue deal announced on Sunday.