LONDON (AP) – Shares of Credit Suisse plunged 60.5% on Monday after banking giant UBS said it would buy its troubled Swiss rival for nearly $3.25 billion in a deal orchestrated by regulators to try to avoid further turmoil in the global banking system.
UBS shares also fell nearly 5% on the Swiss stock exchange.
Swiss authorities have urged UBS to buy out its smaller rival after the central bank’s plan for Credit Suisse to borrow up to 50 billion francs ($54 billion) last week failed to reassure investors and customers. Shares of Credit Suisse and other banks tumbled last week after the failure of two banks in the US raised questions about other potentially weak global financial institutions.
“Only time will tell how this shotgun wedding is received,” said Neil Shearing, group chief economist for Capital Economics.
Markets remained nervous on Monday despite efforts by regulators to restore calm. In the United States, the Federal Deposit Insurance Corp. said on Sunday that the New York Community Bank had agreed to buy a significant portion of the bankrupt Signature Bank in a $2.7 billion deal.
Global stock markets sank, with European banking stocks down more than 2%. Wall Street futures are down 1%.
Many of Credit Suisse’s problems were unique to and different from the weaknesses that brought down Silicon Valley Bank and Signature Bank in the United States. It has faced a variety of problems in recent years, including bad bets on hedge funds, repeated changes in its top management and a spy scandal involving UBS.
Analysts and financial leaders say the safeguards are stronger since the 2008 global financial crisis and that banks around the world have plenty of cash available and central bank backing. But fears about the risks of the deal, losses for some investors and the decline in the market value of Credit Suisse could renew fears about the health of the banks.
“Containing crises is a bit like a game of whack the mole — with new fires starting while existing ones are extinguished,” Shearing said. “A key question over the next week will be whether problems arise in other institutions or parts of the financial system.”
Credit Suisse is among 30 financial institutions known as systemically important banks globally, and regulators were concerned about the consequences of bankruptcy.
“An uncontrolled collapse of Credit Suisse would have incalculable consequences for the country and the international financial system,” Swiss President Alain Berset said when announcing the deal on Sunday evening.
UBS is bigger, but Credit Suisse wields considerable influence, with $1.4 trillion in assets under management. It has major trading desks around the world, caters to the wealthy through its wealth management business, and is a leading M&A advisor. Credit Suisse got through the 2008 financial crisis unassisted, unlike UBS.
Switzerland’s executive branch approved an emergency ordinance allowing the merger to proceed without shareholder approval.
As part of the deal, about 16 billion francs ($17.3 billion) in high-risk Credit Suisse bonds will be wiped out. This has raised concerns about the market for those bonds and the other banks that hold them.
The combination of the two largest and most famous Swiss banks, each with legendary histories dating back to the mid-19th century, affects Switzerland’s reputation as a global financial centre, putting it on the brink of having a single national banking champion.
The deal follows the collapse of two major US banks last week that spurred a frantic and large-scale response from the US government to stave off further panic.
In an effort to shore up the global financial system, the world’s central banks have announced coordinated moves to stabilize banks, including access to a lending facility for banks to borrow US dollars if they need to, a widely used practice. during the 2008 crisis.
Credit Suisse chairman Axel Lehmann called the sale to UBS “a clear game changer”.
“It is a historic, sad and very challenging day for Credit Suisse, for Switzerland and for the global financial markets,” Lehmann said on Sunday, adding that the focus is now on the future and the future of Credit Suisse’s 50,000 employees, 17,000 of which are in Switzerland.
Colm Kelleher, the chairman of UBS, hailed “tremendous opportunities” from the acquisition and highlighted his bank’s “conservative risk culture” – a subtle blow to Credit Suisse’s reputation for making wild bets in pursuit of higher returns. He said the combined group will create an asset manager with more than $5 trillion in total assets invested.
UBS officials have said they plan to sell parts of Credit Suisse or reduce the size of the bank.
To back up the deal, the Swiss central bank is providing a loan of up to 100 billion francs and the government is providing another 100 billion francs of support as backstop if needed.
European Central Bank President Christine Lagarde praised the “swift action” of Swiss officials, saying they were “instrumental in restoring orderly market conditions and ensuring financial stability”.
He reiterated that the European banking sector is resilient, with strong financial buffers and plenty of available liquidity. Credit Suisse’s parent bank is not part of European Union supervision, but it has entities in several European countries that are.
Last week, when the ECB raised interest rates, it said banks “are in a completely different position than they were in 2008” during the financial crisis, in part due to tighter government regulation.
Investors and banking sector analysts were still mulling the deal, but at least one analyst has suggested it could tarnish Switzerland’s global banking image.
“A nationwide reputation for prudent financial management, robust regulatory oversight and, frankly, for being a bit dour and boring when it comes to investing has been blown away,” said Octavio Marenzi, CEO of the consultancy Opimas LLC, in an email.
McHugh reported from Frankfurt, Germany. Associated Press writers Jamey Keaten in Geneva, Ken Sweet in New York, Frank Jordans and Emily Schultheis in Berlin, Barbara Ortutay in Oakland, California, and Chris Rugaber in Washington contributed.