by Stefania Spezzati, Oliver Hirt and John O’Donnell

BERN (Reuters) – UBS will buy Credit Suisse for three billion Swiss francs (3.04 billion euros) and assume up to 5.4 billion dollars (5.05 billion euros) in losses , as part of a merger between the two banks imagined by the Swiss authorities and applauded by several central bankers, anxious to avoid further market turbulence.

In a sign of a coordinated global response, the European Central Bank (ECB) pledged to support eurozone banks with loans if needed, adding that the bailout of Credit Suisse by the Swiss authorities had been “decisive to restore calm.

“The eurozone banking sector is resilient, with strong capital and liquidity positions,” writes the ECB. “In any case, our political toolbox is fully equipped to provide liquidity support to the eurozone financial system if necessary and to preserve the smooth transmission of monetary policy,” adds the Frankfurt institute.

US Federal Reserve (Fed) Chairman Jerome Powell and US Treasury Secretary Janet Yellen also welcomed the Swiss authorities’ announcement aimed at ensuring financial stability.

The Swiss regulatory authorities were forced to intervene and implement a plan to prevent a crisis of confidence around Credit Suisse from spreading to the entire financial system. The agreement between UBS and Credit Suisse should be finalized by the end of the year.

The Bank of England (BoE) also applauded the measures taken by the Swiss authorities and assured that the British banking system was well funded.

The merger between the two Swiss banking giants is part of the efforts implemented in Europe and the United States to support the sector since the collapse of the American regional banks Silicon Valley Bank and Signature Bank.

A “DECISIVE INTERVENTION”

It is currently unclear whether the agreement between UBS and Credit Suisse will be sufficient to restore confidence in the global banking sector. The opening session of financial markets in Asia, Australia and New Zealand, in a few hours, could provide a first answer.

Euro contracts suggested a slight rise in the single European currency to $1.0674.

“This seems like a very important and decisive move,” said Brian Jacobsen, chief strategist at Allspring Global Investments.

“If markets don’t smell any other lingering issues, I think that should be pretty positive. Governments are intent on snuffing out the spark of contagion before the blazes spiral out of control,” he said. he adds.

The Federal Deposit Insurance (FDIC), the American federal deposit guarantee authority, plans to relaunch the process of selling Silicon Valley Bank according to sources familiar with the matter.

UBS Chairman Colm Kelleher told a press conference that Credit Suisse’s investment bank, which employs thousands of people around the world, was going to be liquidated. UBS said it expects annual savings of around $7 billion by 2027.

The Swiss National Bank (SNB), the country’s central bank, said the deal between Credit Suisse and UBS included 100 billion Swiss francs (101.2 billion euros) in liquidity aid for the two groups.

Under the terms of the all-share buyback transaction, Credit Suisse shareholders will receive one UBS share for every 22.48 Credit Suisse shares held, equivalent to 0.76 Swiss francs per share, for a total amount of three billion Swiss francs, said UBS.

Credit Suisse also reduced the value of its portfolio of Additional Tier 1 bonds to zero, angering some bondholders who believed they were better protected under the bailout. These bonds, which are a riskier type of debt than traditional bonds, have a face value of $17 billion.

Badly treated on the stock market after the decision of its main shareholder which excluded any new financing, Credit Suisse benefited last week from aid of 54 billion dollars from the SNB in ​​a context of closure of the American regional banks Silicon Valley Bank and Signature Bank.

Credit Suisse is among the 30 most important banks in the world from a systemic point of view and a failure would have sent shock waves through the entire global financial sector.

“With the takeover of Credit Suisse by UBS, a solution has been found to ensure financial stability and protect the Swiss economy in this exceptional situation,” the SNB and other authorities in the country said.

Finma, the financial market regulator, has approved the merger between UBS and Credit Suisse. She added noting a risk that Credit Suisse could become “illiquid”, even if the bank remained solvent, and that it was “necessary for the authorities to act”.

Credit Suisse Chairman Axel Lehmann said the merger was the best way to preserve confidence, while Swiss Finance Minister Karin Keller-Sutter said the primary objective was to protect the financial center and the Swiss economy.

(Reporting John Revill, Noele Illien, John O’Donnell, Oliver Hirt and Tom Sims; with Abinaya Vijayaraghavan in Bangalore; Claude Chendjou)

Copyright © 2023 Thomson Reuters