Credit Suisse, UBS shares dive following takeover announcement

Shares of Credit Suisse plunged 60.5 per cent on Monday after banking giant UBS said it would buy its troubled Swiss rival for almost US$3.25 billion in a deal orchestrated by regulators to try to stave off further turmoil in the global banking system.

UBS shares also were down nearly five per cent on the Swiss stock exchange.

Swiss authorities urged UBS to take over its smaller rival after a central bank plan for Credit Suisse to borrow up to 50 billion francs (US$54 billion) last week failed to reassure investors and customers. Shares of Credit Suisse and other banks had plunged last week after the failure of two banks in the U.S. 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.

Read more: UBS to buy Credit Suisse in effort to create stability, Swiss president says

Markets remained jittery Monday despite efforts of regulators to restore calm. In the U.S., the Federal Deposit Insurance Corp. said late Sunday that New York Community Bank agreed to buy a significant chunk of the failed Signature Bank in a US$2.7 billion deal.

Global stock markets sank, with European banking stocks dropping more than two per cent. Wall Street futures were off one per cent.

Many of Credit Suisse’s problems were unique and unlike the weaknesses that brought down Silicon Valley Bank and Signature Bank in the U.S. It has faced an array of troubles in recent years, including bad bets on hedge funds, repeated shake-ups of its top management and a spying scandal involving UBS.

Analysts and financial leaders say safeguards are stronger since the 2008 global financial crisis and that banks worldwide have plenty of available cash and support from central banks. But concerns about risks to the deal, losses for some investors and Credit Suisse’s falling market value could renew fears about the health of banks.

“Containing crises is a bit like a game of whack-a-mole – with new fires starting as existing ones are extinguished,” Shearing said. “A key issue 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 globally systemically important banks, and authorities were worried about the fallout if it were to fail.

Read more: Banking turmoil is adding to sense of looming economic ‘precipice.’ What’s next?

“An uncontrolled collapse of Credit Suisse would lead to incalculable consequences for the country and the international financial system,” Swiss President Alain Berset said as he announced the deal Sunday night.

UBS is bigger but Credit Suisse wields considerable influence, with US$1.4 trillion assets under management. It has significant trading desks around the world, caters to the rich through its wealth management business, and is a major mergers and acquisitions advisor. Credit Suisse did weather the 2008 financial crisis without assistance, unlike UBS.

Switzerland’s executive branch passed an emergency ordinance allowing the merger to go through without shareholder approval.

As part of the deal, approximately 16 billion francs (US$17.3 billion) in higher-risk Credit Suisse bonds will be wiped out. That has triggered concern about the market for those bonds and for other banks that hold them.

The combination of the two biggest and best-known Swiss banks, each with storied histories dating to the mid-19th century, strikes at Switzerland’s reputation as a global financial center — putting it on the cusp of having a single national banking champion.

The deal follows the collapse of two large U.S. banks last week that spurred a frantic, broad response from the U.S. government to prevent further panic.

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In a bid to shore up the global financial system, the world’s central banks announced coordinated moves to stabilize banks, including access to a lending facility for banks to borrow U.S. dollars if they need them, a practice widely used during the 2008 crisis.

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Credit Suisse Chairman Axel Lehmann called the sale to UBS “a clear turning point.”

“It is a historic, sad and very challenging day for Credit Suisse, for Switzerland and for the global financial markets,” Lehmann said Sunday, adding that the focus is now on the future and on what’s next for Credit Suisse’s 50,000 employees — 17,000 of whom are in Switzerland.

Colm Kelleher, the UBS chairman, hailed “enormous opportunities” from the takeover and highlighted his bank’s “conservative risk culture” — a subtle swipe at Credit Suisse’s reputation for more swashbuckling gambles in search of bigger returns. He said the combined group would create a wealth manager with over $5 trillion in total invested assets.

UBS officials said they plan to sell off parts of Credit Suisse or reduce the bank’s size.

To support 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 a backstop if needed.

European Central Bank President Christine Lagarde lauded the “swift action” by Swiss officials, saying they were “instrumental for restoring orderly market conditions and ensuring financial stability.”

She reiterated that the European banking sector is resilient, with strong financial reserves and plenty of ready cash. The Credit Suisse parent bank is not part of European Union supervision, but it has entities in several European countries that are.

Read more: Credit Suisse and First Republic are the latest banks in peril. What’s happening?

Last week, when the ECB raised interest rates, she said banks “are in a completely different position from 2008” during the financial crisis, partly because of stricter government regulation.

Investors and banking industry analysts were still digesting the deal, but at least one analyst suggested it might tarnish Switzerland’s global banking image.

“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,” Octavio Marenzi, CEO of consulting firm Opimas LLC, said in an email.