UBS to Buy Credit Suisse in Unprecedented Global Response by Central Banks

On the 19th of March, several of the world's largest central banks collaborated to prevent a banking crisis from spreading.

Swiss authorities convinced UBS Group AG to acquire Credit Suisse Group AG for a historic price of 3 billion Swiss francs ($3.23 billion) and to take on potential losses of up to $5.4 billion.

The deal is expected to be finalized by the end of 2023 and is supported by a significant Swiss guarantee. In response to this news, the U.S. Federal Reserve, the European Central Bank, and other major central banks issued statements to reassure markets that have been impacted by a banking crisis that began with the collapse of two regional U.S. banks earlier this month.

The futures for S&P 500 and Nasdaq both increased by 0.4%, but later decreased slightly from earlier gains.

New Zealand experienced a drop in the opening, and Australian shares experienced a loss of 0.5%. Although the safe-haven dollar lost value compared to the euro and Sterling, it gained value compared to the yen. The pressure on UBS played a role in securing the deal on Sunday.

According to Reuters, UBS Chair Colm Kelleher spoke to analysts on a conference call and stated that it was a momentous day in Switzerland, and one they had hoped would never happen.

Kelleher emphasized that while UBS did not initiate discussions, the transaction would be financially beneficial to UBS shareholders.

UBS CEO Ralph Hamers acknowledged that there were still many unknowns that needed to be resolved. Hamers apologized for any unanswered questions and expressed his willingness to provide further clarification.

In a coordinated effort to increase market liquidity, central banks in Canada, England, Japan, the European Union, Switzerland, and the U.S. Federal Reserve responded with a global initiative not seen since the pandemic's height.

The European Central Bank committed to providing loans to support euro zone banks if needed and praised the Swiss rescue of Credit Suisse as instrumental in restoring stability.

Fed Chair Jerome Powell and U.S. Treasury Secretary Janet Yellen welcomed the Swiss authorities' announcement, as did the Bank of England.

Lloyd Blankfein, the former chairman and CEO of Goldman Sachs Group, noted that the financial sector's greater risk environment leads to the conservation of capital, less risk-taking, more conservative investing and lending, and lower growth.

He pointed out that although some banks have struggled with poorly managed, concentrated risk, the overall banking system is well capitalized and more tightly regulated than in previous challenging times.

Following the collapse of Silicon Valley Bank and Signature Bank, efforts to support the banking sector have been made in Europe and the United States.

Although some investors cautiously welcomed the measures taken over the weekend, they remain watchful of any lingering issues that may be present.

Brian Jacobsen, a senior investment strategist at Allspring Global Investments, stated that if markets do not detect any other problems, the initiatives taken should have a positive effect.

Although several large banks deposited $30 billion into First Republic Bank (FRC.N) to assist the institution following the failures of Silicon Valley and Signature Bank, U.S. bank stocks remained under pressure, indicating that issues persist within the U.S. banking sector.

On Sunday, S&P Global downgraded First Republic's credit ratings to even lower levels of junk status, citing doubts that the deposit infusion would address its liquidity concerns.

However, a U.S. official stated that U.S. bank deposits have stabilized, with some experiencing a slowdown or reversal of outflows.

The official also mentioned that the problems at Credit Suisse are unrelated to recent deposit runs on U.S. banks, and that U.S. banks have limited exposure to Credit Suisse.

In the meantime, the U.S. Federal Deposit Insurance Corp (FDIC) is preparing to restart the sale process for Silicon Valley Bank (SIVB.O), with a potential breakup of the lender being considered, according to individuals familiar with the situation.

The intervention

In response to fears of contagion in the European banking sector, major central banks, including the Fed and ECB, have intervened to enhance market liquidity.

The move was greeted with a degree of risk appetite in the markets, with several currencies rising against the dollar. However, analysts warn that it is too soon to signal an all-clear, and UBS's decision to wind down Credit Suisse's investment bank, resulting in thousands of job losses, may have wider repercussions.

The Swiss central bank has pledged 100 billion Swiss francs ($108 billion) in liquidity assistance, with Credit Suisse shareholders receiving 1 UBS share for every 22.48 Credit Suisse shares held.

Some Credit Suisse bondholders will be major losers in the deal, with bonds worth $17 billion being valued at zero, causing anger among some debt holders.