UBS to take over Credit Suisse, central banks act on liquidity

FAN Editor

LONDON/NEW YORK (Reuters) -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.

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:

JAMES BIANCO, PRESIDENT, BIANCO RESEARCH, CHICAGO, IL

“(The central bank action is) a form of QE right out of the COVID/2008 playbook. Couple that with the record discount window borrowing and the expansion of the balance sheet, and the tide is turning to an easier Fed.

“One of two things happens, they move too slowly and the financial crisis worsens. They move fast enough to stem the crisis, and the massive amount of stimulus means an even bigger inflation problem in 2H 2023 and into 2024.”

“Only one good option, everyone decides on their own to transfer hundreds of billions of deposits back in regional banks. The point is there are only bad options and worse options as long as money is leaving regional banks.”

MICHAEL PURVES, CHIEF EXECUTIVE OF TALLBACKEN CAPITAL ADVISORS, NEW YORK, NY:

“In March 2000, amid COVID, the Fed saw a surge in the dollar… So (the) Fed aggressively put in lines to every major central bank. Today, the Fed is pulling out the same playbook. Now you have a small country with two giant banks, one of them was obviously under a huge pressure. So this is sort of a tool the Fed has to alleviate this type of shock stress and it doesn’t necessarily cost them that much to do it.”

“The Fed wants to make sure the Swiss Central Bank isn’t going to have any problems.”

“The line doesn’t really necessarily cost the Fed that much and it’s not necessarily not overtly inflationary anyway.”

“Whatever global macro crisis you want to look at, people rush to buy dollars – that can be very destabilizing to some of international economies.”

EDWARD MOYA, SENIOR MARKET ANALYST, OANDA, NEW YORK

“The global financial system is still at great risk, and central bankers are showing they learned lessons from GFC and are trying to get in front of this. More banks are at danger and coordinated action might buy some banks some time.”

JEFF GITTERMAN, CEO OF ESG-FOCUSED GITTERMAN ASSET MANAGEMENT IN NEW JERSEY SAID:

“(It) feels like 08 again a bit.

“I think the rating agencies will have to keep up with more downgrades than this past week which will pressure the banks even more. This will most likely spook investors and more selling of regionals to continue. I don’t see how we don’t enter a recession as most failures of banks or financial institutions immediately preceded a recession. So a 10-15 % market drop (is) likely especially if the Fed still goes 25 which I think they probably will, although I would not bet on it.”

MARSHALL FRONT, CHIEF INVESTMENT OFFICER, FRONT BARNETT ASSOCIATES, CHICAGO

“This (central bank action) is no surprise. They have done this on other occasions when there was a liquidity risk. Some on Wall Street also see the possibility (of) further Fed actions to shore up confidence in the US banking system to stem additional runs. For example, there is an explicit guarantee for depositor’s balances above $250,000 at certain institutions. Some expect those guarantees to be broadened, increasing and possibly extending the amount to other institutions.”

“Given the fragility of the current situation, banking regulators will certainly have given these options consideration. Whether they act to do so is an open question.”

MIKE O’ROURKE, CHIEF MARKET STRATEGIST, JONES TRADING (IN A NOTE)

“It should be clear that after more than a week into the banking panic, and two interventions organized by the authorities, this problem is not going away. Quite the contrary, it has gone global. The reports that UBS is acquiring Credit Suisse will likely magnify Credit Suisse’s problems by moving them to UBS… The prime concern of every bank for the immediate future is preventing deposit flight. It should be clear that

the most expedient and effective solution to this crisis is an expansion and modernization of the FDIC deposit insurance

regime. It has become vastly apparent that the banking industry and its regulators were not prepared for a banking crisis

in the instantaneous information era.”

CHRIS MARINAC, DIRECTOR OF RESEARCH, JANNEY MONTGOMERY SCOTT

“This (CS/UBS deal) is a transaction designed to clear-the-market so European credit access can move forward. The Credit Suisse issues are not new and needed to be resolved years ago. Thank Goodness something finally happened.”

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.”

(Reporting by the finance and markets team, Carolina Mandl in New York, Ross Kerber in Boston; Compiled by Dhara Ranasinghe and Megan Davies, Editing by Tommy Reggiori Wilkes)

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