Some of the world’s largest central banks came together on Sunday to stop a banking crisis from spreading as Swiss authorities persuaded UBS Group AG on Sunday to buy rival Credit Suisse Group AG in a historic deal.
UBS will pay 3 billion Swiss francs ($4.4 billion Cdn) for 167-year-old Credit Suisse and assume up to $5.4 billion US ($7.4 billion Cdn) 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 U.S. Federal Reserve, European Central Bank 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 U.S. banks earlier this month.
S&P 500 and Nasdaq futures were each up 0.4 per cent, both giving back some earlier gains. New Zealand dipped at the open and Australian shares opened with a 0.5 per cent loss. The safe-haven dollar lost ground against Sterling and the euro but was up versus the yen.
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. “I would like to make it clear that while we did not initiate discussions, we believe that this transaction is financially attractive for UBS shareholders,” Kelleher said.
UBS CEO Ralph Hamers said 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 apologize for it.”
In a global response not seen since the height of the pandemic, the Fed said it had joined with central banks in Canada, England, Japan, the EU and Switzerland in a coordinated action to enhance market liquidity. The ECB vowed to support euro zone banks with loans if needed, adding the Swiss rescue of Credit Suisse was “instrumental” for restoring calm.
Switzerland’s government has fast-tracked approval for the country’s largest bank, UBS, to take over its ailing rival Credit Suisse to prevent a banking crisis. Experts say it’s a reflection of tough financial times.
Fed Chair Jerome Powell and U.S. Treasury Secretary Janet Yellen welcomed the announcement by the Swiss authorities. The Bank of England also praised the Swiss.
“The greater risk environment for financials leads to husbanding of capital and risk-taking, less and more conservative investing and lending, and inevitably, lower growth,” said Lloyd Blankfein, former chairman and CEO of Goldman Sachs Group Inc.
“While some banks have been hung up by poorly managed, concentrated risk, the overall banking system is extremely well capitalized and substantially more tightly regulated than in prior challenging times.”
The Current19:15How Credit Suisse reached a crisis point
Two U.S. banks collapsed in less than a week, while in Europe, Credit Suisse teetered on the brink of failure before Switzerland’s central bank stepped in with a loan. Are there implications for Canada’s banking sector? Matt Galloway talks to Eric Reguly, European bureau chief for The Globe and Mail; and Kenneth Rogoff, a professor of economics at Harvard University and former chief economist of the International Monetary Fund.
The Swiss banking marriage follows efforts in Europe and the United States to support the sector since the collapse of U.S. 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 U.S. banking sector, where bank stocks remained under pressure despite a move by several large banks to deposit $30 billion ($41 million Cdn) into First Republic Bank, an institution rocked by the failures of Silicon Valley and Signature Bank.
Some of America’s top lenders have deposited $30 billion at First Republic Bank to prevent another potential collapse of a U.S. bank. Juggernauts like JP Morgan, Wells Fargo and Bank of America were involved in the rescue package.
On Sunday, First Republic saw its credit ratings downgraded deeper into junk status by S&P Global, which said the deposit infusion may not solve its liquidity problems.
U.S. bank deposits have stabilized, with outflows slowing or stopping and in some cases reversing, a U.S. official said on Sunday, adding the problems of Credit Suisse are unrelated to recent deposit runs on U.S. banks and that U.S. banks have limited exposure to Credit Suisse.
The U.S. Federal Deposit Insurance Corp (FDIC), meanwhile, is planning to relaunch the sale process for Silicon Valley Bank, with the regulator seeking a potential breakup of the lender, according to people familiar with the matter.
Decisive intervention
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.
The Sunday Magazine18:31Political economist John Rapley on plummeting public faith in financial institutions
Fallout from the collapse of Silicon Valley Bank plunged the world’s financial sector into a tumultuous week of ups and downs, and the ripple effects continue, leading to worries of a looming banking crisis similar to the crash of 2008. Despite all the uncertainty, John Rapley, a Canadian political economist at the University of Cambridge, believes the global economy is not on the verge of chaos. The author of Twilight of the Money Gods: Economics as a Religion and How It All Went Wrong joins David Common to explain why stricter regulations on banks could help restore public confidence in the economy, and what Canada in particular needs to consider in the current climate.
UBS Chair Colm 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 some $7 billion US ($9.6 billion Cdn) by 2027.
The Swiss central bank said Sunday’s deal includes 100 billion Swiss francs ($148 billion Cdn) 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 $54 billion US ($74 billion Cdn) 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 $17 billion US ($25 billion Cdn) 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.