Some of the world's largest central banks have come together to stop a banking crisis from spreading, in the wake of Swiss authorities persuading multinational investment bank UBS to buy beleaguered rival Credit Suisse in a historic deal.
UBS will take over Credit Suisse for $3 billion Swiss francs ($4.8 billion) in a bid to rescue the embattled lender — a move backed by Swiss authorities.
Soon after the announcement, the US Federal Reserve, European Central Bank (ECB) and other major central banks issued statements to reassure markets walloped by the banking crisis, which started with the collapse of two regional US banks earlier this month.
Credit Suisse, a 167-year-old bank, has been the biggest name ensnared in the market turmoil unleashed by the recent collapse of Silicon Valley Bank and Signature Bank, forcing it to tap $US54 billion ($80 billion) in central bank funding last week.
In a global response not seen since the height of the pandemic, the US Federal Reserve said it had joined with central banks in Canada, England, Japan, the EU and Switzerland in a coordinated action to enhance market liquidity.
The ECB vowed to support eurozone banks with loans if needed, adding the Swiss rescue of Credit Suisse would be "instrumental" in 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."
US Federal Reserve chairman Jerome Powell and US Treasury secretary Janet Yellen welcomed the announcement by the Swiss authorities.
In relation to the closure of Signature Bank, a subsidiary of New York Community Bancorp has entered into an agreement with US regulators to purchase the bank's deposits and loans.
The Federal Deposit Insurance Corporation (FDIC) said the deal would see Flagstar Bank, the subsidiary, assume substantially all deposits and certain loan portfolios, and all 40 of Signature Bank's former branches.
The FDIC said roughly $US60 billion of the bank's loans and $US4 billion of its deposits would remain in receivership.
What does the UBS-Credit Suisse deal involve?
The deal includes 100 billion Swiss francs ($160 billion) in liquidity assistance for UBS and Credit Suisse from the Swiss central bank.
The deal is expected to close by the end of 2023.
Switzerland's regulator FINMA said there was a risk Credit Suisse could have become "illiquid, even if it remained solvent, and it was necessary for the authorities to take action".
"With the takeover of Credit Suisse by UBS, a solution has been found to secure financial stability and protect the Swiss economy in this exceptional situation," the Swiss central bank and other authorities said.
Swiss President Alain Berset said the takeover was the best way to provide confidence in the Swiss financial centre.
"An uncontrolled collapse of Credit Suisse would lead to incalculable consequences for the country and the international financial system," Mr Berset said.
Authorities had been scrambling to rescue Credit Suisse, which is among the world's largest wealth managers, before financial markets reopened on Monday.
'Merger of the century'
UBS and Credit Suisse are both in a group of the 30 global systemically important banks watched closely by regulators, and Credit Suisse's failure would have rippled throughout the entire financial system.
"Anything that happened to Credit Suisse would have been of a systemic nature, because banks deal with each other … which is why we can't afford to let Credit Suisse fall," RMIT associate professor of finance Angel Zhong told ABC News Breakfast.
She described UBS's takeover of Credit Suisse as "the merger of the century".
Dr Zhong said Credit Suisse's share price had reach an historic low, reporting a loss of 7.3 billion Swiss francs ($11.7 billion) last year.
"Credit Suisse was in big trouble last week," she said, and added that while the two US banks were not as significant, the "contagion of market sentiment" also led to trouble for Credit Suisse.
FINMA, which said it had approved the takeover, said recent measures to stabilise Credit Suisse were "not enough to restore confidence in the bank, however, and more far-reaching options were also examined".
To enable UBS to take over Credit Suisse, Switzerland's federal government was providing a loss guarantee of a maximum of 9 billion Swiss francs for a clearly defined part of the portfolio, the government said.
This will be activated if losses are actually incurred on this portfolio. In that eventuality, UBS would assume the first 5 billion francs, the federal government the next 9 billion francs, and UBS would assume any further losses, the government said.
Switzerland's Finance Minister, Karin Keller-Sutter, said the move was not a bailout.
"This is no bailout. This is a commercial solution," she said.
ABC/wires
