Six major central banks, including the Bank of England, have taken coordinated action to boost dollar flows to help stem the crisis of confidence gripping more lenders.
The so-called swap line arrangement, involving the US Federal Reserve, Bank of Japan, European Central Bank, Bank of Canada and Swiss National Bank (SNB) aims to “enhance the provision of liquidity” and the “smooth functioning of US dollar funding markets”.
It is hoped that the 7-day a week facility, which is due to run until at least the end of April, will be enough to bolster market confidence over the health of other banks, particularly US regional lenders.
Many have seen their share prices collapse in the wake of the failure of Silicon Valley Bank earlier this month, stemming from worries that the aggressive pace of interest rate rises to tackle inflation have soured balance sheets.
However, stock markets across Asia started the week in the red again – after the forced UBS takeover of Credit Suisse during the weekend – with the Hang Seng in Hong Kong falling 3%.
Europe was also set to see further weakness, according to financial commentators, despite the rescue.
The FTSE 100, which has lost almost 7% of its value so far this month, shed a further 0.75% when trading began.
It, however, was led lower by oil stocks as prices are damaged by speculation that banking weakness will harm the global economy.
It had been hoped that the rushed takeover of Credit Suisse, engineered by the SNB and deliberately agreed ahead of the market open, would ease concerns.
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The 167-year-old embattled lender, was brought to the brink of financial calamity last week, despite securing a $54bn (£44bn) credit line from Switzerland’s central bank.
The credit line was agreed upon in a move aimed at reassuring markets and depositors, but it failed to stem a rush of customer withdrawals, prompting a request from the Swiss government for rival UBS to consider a takeover.
That takeover was announced on Sunday evening – UBS will pay 3bn Swiss francs (£2.6bn) to acquire Credit Suisse, it has agreed to assume up to 5bn francs (£4.4bn) in losses, and 100bn Swiss francs (£88.5bn) in liquidity assistance will be available to both banks.
The deal is expected to close by the end of this year. It was seen as potentially threatening jobs in the UK as Credit Suisse employs 6,000 staff in the City.
UBS shares were 7% down in pre-market deals on Monday morning and the opening price was later delayed, likely due to high volumes.
Colm Kelleher, chairman of UBS Group, said the agreement “represents enormous opportunities”.
He also said that his bank’s long-term aim would be to downsize Credit Suisse’s investment banking business and align it with the “conservative risk culture” of UBS.
Axel Lehmann, chairman of Credit Suisse, described the day as “historic, sad and very challenging” for his bank and the global market.
‘The best available outcome’
Mr Lehmann said: “Given recent extraordinary and unprecedented circumstances, the announced merger represents the best available outcome.
“This has been an extremely challenging time for Credit Suisse and while the team has worked tirelessly to address many significant legacy issues and execute on its new strategy, we are forced to reach a solution today that provides a durable outcome.”
‘Exceptional situation’
In a statement, the Swiss central bank and other officials said that the agreement represented “a solution…to secure financial stability and protect the Swiss economy in this exceptional situation”.
It is also hoped that UBS’s takeover of its old rival will avoid the contagion of the kind seen in the financial crisis of 2008.
Central banks insist systems are resilient
The news was welcomed by central banks in the US, Europe and in the UK.
All three insisted that banking systems within their jurisdiction are strong and resilient.
The Bank of England said: “We have been engaging closely with international counterparts throughout the preparations for today’s announcements and will continue to support their implementation.
“The UK banking system is well capitalised and funded, and remains safe and sound.”
Credit Suisse is one of the world’s largest wealth managers and is also one of 30 banks ranked as systemically important, meaning the deal is likely to ripple through global markets on Monday.
It is also one of the largest investment banking employers in the City of London, employing around 5,000 people.
In a memo to employees on Sunday, Credit Suisse said there would be no immediate impact on clients or day-to-day working operations, adding that branches and global offices would remain open.
It comes after a difficult few weeks for the banking sector, with the collapse of US lenders Silicon Valley Bank and Signature Bank.
The UK branch of SVB was rescued by HSBC for £1, but a number of other mid-sized American lenders have also been forced to seek emergency funding.
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