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.
Meanwhile, the U.S. Federal Reserve on Sunday said it had joined with the Bank of Canada, Bank of England, Bank of Japan, European Central Bank and Swiss National Bank in a coordinated action to enhance the provision of liquidity through the standing U.S. dollar swap line arrangements.
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 $1.0674, marginally higher 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:
JOHANN SCHOLTZ, EQUITY ANALYST AT MORNINGSTAR, COVERING EUROPEAN BANKS, AMSTERDAM
“Under normal circumstances, I would say it is an absolutely fantastic deal for UBS, but in the current environment it is a bit more complicated as there is a lot of uncertainty generally in the markets. One big fear would be that some of the concerns about Credit Suisse just spill to UBS.”
“Some area of concern, which we need more clarity, is the extent of the outflows from Credit Suisse and also the restructuring costs that UBS will incur. I think they will be able to offset restructuring costs against large negative goodwill that they created through this deal.”
“The franchise of Credit Suisse is worth much more than the price UBS is paying for it, so I think Credit Suisse shareholders will actually feel a little bit of grief.”
“In the past, when a deal between Credit Suisse and UBS was discussed, a sticking point would be concentration, especially in the domestic market. An IPO of the domestic unit now is obviously an option for UBS, but it is also the most stable part of the business, that generates quite a lot of cash. If UBS is not required to do an IPO of it, it could make sense for them to keep it, there are lots of synergies.”
JONATHAN MACEY, PROFESSOR OF CORPORATE LAW, CORPORATE FINANCE AND SECURITIES LAW, YALE UNIVERSITY, NEW HAVEN CONN.
“The lack of (a) shareholder vote reflects the dire condition of Credit Suisse and indicates how much time pressure the banks and the regulators were under to get this deal done in light of the huge outflows of funds from Credit Suisse since late 2022. About $17 billion of a bonds, known as AT1s will be written off in this deal, which reflects a significant haircut for non-depositor creditors.”
“Under Swiss law, UBS would have had to give shareholders six weeks to consider the acquisition, which was far too much time under the circumstances. Also, given the discount in the merger price to the market price of Credit Suisse’s stock, there was a real chance that shareholders would not have approved the transaction.”
BRIAN JACOBSEN, SENIOR INVESTMENT STRATEGIST AT ALLSPRING GLOBAL INVESTMENTS, U.S.
“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 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.”
MICHAEL ROSEN, CHIEF INVESTMENT OFFICER, ANGELES INVESTMENTS, SANTA MONICA, CALIFORNIA
“The UBS-CS deal is the best solution the market could have hoped for. CS shareholders are essentially wiped out, and some (AT1) bondholders will be wiped out, but the basic functioning of the banking system was protected.
“Bank stocks should rally on the news, but it is premature to signal all-clear. Monetary tightening has eviscerated bank margins, and a reversal of tight monetary policy is not possible with inflation significantly, and stubbornly, higher than target. More broadly, and more importantly, tight monetary policy and a fragility in the banking system raise the risks of recession, thus contributing to more fragility in the banking sector.”
“Markets may celebrate the rescue of CS, but it will be a short celebration.”
OCTAVIO MARENZI, CEO, OPIMAS, VIENNA
“Switzerland’s 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. There’s 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 don’t 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 there’s 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…we’ll 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.”
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.”
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