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 to buy rival Credit Suisse Group AG in a historic deal.

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UBS will pay 3 billion Swiss francs (US$3.23 billion) for 167-year-old Credit Suisse and assume up to US$5.4 billion 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 March 19, the U.S. Federal Reserve, the Bank of Canada, 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.

In a global response of the type 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 banks said they would start offering daily loans in dollars to their banks to avert stress in the funding market.

The coordinated move, reminiscent of the global financial crisis of more than a decade ago, will see the Federal Reserve and the central banks of the eurozone, Britain, Japan and Canada offer seven-day dollar loans to their banks starting on Monday.

“To improve the swap lines’ effectiveness in providing U.S. dollar funding, the central banks currently offering U.S. dollar operations have agreed to increase the frequency of 7-day maturity operations from weekly to daily,” the central banks said in a joint statement.

The daily auctions will be held at least through the end of April.

“The network of swap lines among these central banks … serves as an important liquidity backstop to ease strains in global funding markets, thereby helping to mitigate the effects of such strains on the supply of credit to households and businesses,” the Bank of Canada said in its statement on March 19.

Historic rescue

The ECB vowed to support eurozone banks with loans if needed, adding the Swiss rescue of Credit Suisse was “instrumental” for restoring calm.

“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.”

Fed Chair Jerome Powell and U.S. Treasury Secretary Janet Yellen said they welcomed the announcement by the Swiss authorities. The Bank of England also welcomed moves by Swiss authorities.

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 steps taken over the weekend 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 US$30 billion into First Republic Bank, an institution rocked by the failures of Silicon Valley and Signature Bank.

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

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

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’

It was not yet clear if the Swiss deal is enough to restore trust in lenders around the world.

“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.

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 (US$108 billion) 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.

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 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.

© Thomson Reuters 2023