UBS to take over Credit Suisse to stem global crisis of confidence

UBS sealed a deal to buy rival Swiss bank Credit Suisse in an effort to avoid further market-shaking turmoil in global banking, Swiss authorities said on Sunday.

The Swiss central bank will supply substantial liquidity to the merged bank, it said at a news conference in the Swiss capital, Bern. It said the deal marked a solution to secure financial stability and protect the Swiss economy in an exceptional situation.

European Central Bank chief Christine Lagarde said she welcomed the swift action and the decision taken by the Swiss authorities.

MARKET REACTION:

* Early traded prices of the euro suggested the single currency was rising on the back of the news. The euro was last quoted at around $1.07, up around 0.4% on the day.

Last week:

* European banks slid almost 12%, their biggest weekly drop in just over a year. Japanese banks fell almost 11%, their biggest weekly drop since the March 2020 COVID-induced market turmoil. U.S. bank shares have notched up double-digit losses for two straight weeks.

* Two-year U.S. Treasury yields fell 74 bps, their biggest weekly drop since 1987. Two-year German bond yields slid 64 bps — their biggest weekly drop since 1992.

COMMENTS:

OCTAVIO MARENZI, CEO, OPIMAS, VIENNA

Switzerlands standing as a financial centre is shattered – the country will now be viewed as a financial banana republic.

The Credit Suisse debacle will have serious ramifications for other Swiss financial institutions. A country-wide reputation with prudent financial management, sound regulatory oversight, and, frankly, for being somewhat dour and boring regarding investments, has been wiped away.

This deal is bound to generate legal and political resistance. First, the Federal Council has made use of emergency powers to force this merger through. A legal challenge by Credit Suisse shareholders, who will claim that their property has been illegally confiscated, is guaranteed.

“UBS shareholders, for their part, could well revolt against this deal, seeing a risk that Credit Suisse could prove to be a mill stone around UBS‘ neck that will drag both banks under. Secondly, the guarantees are bound to be challenged politically through Switzerland’s system of direct democracy – getting the necessary 100,000 signatures to put this deal to a vote of the people will happen in a matter of days.”

MARCHEL ALEXANDROVICH, EUROPEAN ECONOMIST, SALTMARSH ECONOMICS, LONDON:

Central banks are stepping in and the SNB is offering to provide liquidity if needed. Theres also fiscal policy, so policymakers are doing their bit.

The ECB will be hoping that this draws a line under the events of the last 10 days and concern about financing conditions start to stabilize and ease.

If you come in and see markets have taken this well, we should see a pricing in of further rate increases.

“If they dont take it well, then the views on the ECB will not shift and potentially if the crisis continues focus, will be on what the ECB can to alleviate this.”

HOLGER SCHMIEDING, CHIEF ECONOMIST, BERENBERG, LONDON

They‘ve (Swiss authorities) seen a problem, are dealing with it and that’s a very positive sign for markets.

“That doesn‘t meant that it’s all over but theres no need to panic. The relief for market is that systemic risk is contained.”

MICHAEL BROWN, STRATEGIST, TRADERX, LONDON

The early signs are that it is steading things a little, as you would expect. FX pricing is starting to filter through and – although it‘s the most illiquid market in the world and it’s likely just Wellington in New Zealand trading – the pound and the Aussie dollar are a bit firmer.

“The yen is softer to a similar degree, so the FX market is singing a bit of a ‘risk-off’ song”.

“So I think…well probably will see a knee-jerk risk-on move when the futures market opens later, just because markets will breathe a big sigh of relief. But there are a couple of other things. One is the risk of contagion in Europe and the other is the regional banking mess in the United States.”

BRIAN JACOBSEN, SENIOR INVESTMENT STRATEGIST AT ALLSPRING GLOBAL INVESTMENTS

It seems like a very large and decisive intervention. Provided markets don‘t sniff out other lingering problems, I’d think this should be pretty positive. Governments are intent on snuffing out the spark of contagion before the flames get out of control.

“The key now will be consistency: their actions set a precedent. The inconsistent treatment of Lehman Brothers versus Bear Stearns threw gas on the financial crisis. Now we have to wait and see how US officials treat regional banks.”

“The CS/UBS deal should be good enough to improve sentiment, but there will still be lingering questions about regional banks in the U.S. and whether there are hidden risks in European banks. There is always something to worry about”

MAX GEORGIOU, ANALYST, THIRD BRIDGE, LONDON:

“Today is one of the most significant days in European banking since 2008, with far-reaching repercussions for the industry. These events could alter the course of not only European banking but also the wealth management industry more generally.”

(Reporting by the finance and markets team; Compiled by Dhara Ranasinghe, Editing by Tommy Reggiori Wilkes)