ZURICH – UBS agreed to buy rival Credit Suisse on Sunday, in an eleventh-hour merger engineered by Swiss authorities, as some of the world’s top central banks tried to reassure investors about the health of the banking system.

UBS will pay for 3 billion Swiss francs (S$4.34 billion) and assume up to US$5.4 billion in losses in a deal expected to close by the end of 2023. In a sign of a coordinated global response, the US Federal Reserve on Sunday said it had joined central banks in Canada, England, Japan, the EU and Switzerland in a coordinated action to enhance market liquidity. The European Central Bank vowed to support euro zone banks with loans if needed, adding the Swiss rescue of Credit Suisse was “instrumental” for restoring calm.

Officials raced to rescue the 167-year-old Credit Suisse, among the world’s largest wealth managers, after a brutal week saw the second- and third-largest US bank failures in history. As one of 30 global banks seen as systemically important, a deal for Credit Suisse could ripple through global financial markets.

“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.”

US Federal Reserve Chair Jerome Powell and Treasury Secretary Janet Yellen said they welcomed the announcement by the Swiss authorities.

Swiss regulators were forced to step in and orchestrate a deal to prevent a crisis of confidence spilling over into the broader financial system.

The Bank of England also welcomed moves by Swiss authorities to broker the takeover and said the British banking system was well-funded.

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.

With one crisis at least temporarily smoothed over, attention shifted back toward troubled midsized and smaller US lenders.

Pressure from deposit outflows remained 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.

S&P lowered First Republic Bank’s sovereign credit rating to B+ from BB+ on Sunday.

Four prominent US lawmakers on banking matters said Sunday they would consider whether a higher federal insurance limit on bank deposits was needed.

The US 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’

It was not yet clear if the Swiss deal is enough to restore trust in lenders around the world. Stock markets open shortly in Asia, Australia and New Zealand.

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.

“It seems like a very large and decisive intervention,” said Brian Jacobsen, senior investment strategist at Allspring Global Investments. “Governments are intent on snuffing out the spark of contagion before the flames get out of control.”

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 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.

Credit Suisse has written down its Additional Tier 1 bonds to zero as part of its takeover by UBS, angering some bondholders who thought they would be better protected in the rescue deal. The bonds, which are a riskier type of debt than traditional bonds, have a notional value of 16 billion Swiss francs.

But some investors called Sunday’s developments positive.

“The UBS-CS deal is the best solution the market could have hoped for,” said Michael Rosen, chief investment officer at Angeles Investments. “CS shareholders are essentially wiped out, and some bondholders will be wiped out, but the basic functioning of the banking system was protected.”

Credit Suisse had 1.2 billion Swiss francs in legal provisions at the end of 2022, and disclosed that it saw reasonably possible losses adding another 1.2 billion francs to that total, with several lawsuits and regulatory probes outstanding, according to Bloomberg Intelligence.

Credit Suisse’s market value has plunged to about 7.4 billion Swiss francs from a 2007 peak of more than 100 billion francs. Clients pulled out more than US$100 billion of assets in the final three months of 2022 as concerns mounted about its financial health, and the outflows continued even after it tapped shareholders in a capital raise of four billion Swiss francs. UBS’ market value is 60 billion francs.

A fusion between the two Swiss banking giants, whose headquarters face each other across Zurich’s central Paradeplatz square, would be a historic event for the nation and global finance. 

The two banks, both counted by the international Financial Stability Board as systemically relevant globally, are interlinked through frequent exchanges of executives. Both chairman Axel Lehmann and CEO Ulrich Koerner are former decision-makers at UBS. REUTERS, BLOOMBERG