UBS-Credit Suisse merger: Stocks tank after government-brokered deal announced

Shares of Credit Suisse plunged 60.5% in early trading Monday after the announcement that banking giant UBS would buy its troubled rival for almost $3.25 billion in a deal orchestrated by regulators to stave off further market-shaking turmoil in the global banking system.

UBS shares also were down 8% on the Swiss stock exchange.

Swiss authorities urged UBS to take over its smaller rival after a plan for Credit Suisse to borrow up to 50 billion francs ($54 billion) failed to reassure investors and the bank’s customers. Shares of Credit Suisse and other banks plunged last week after the failure of two banks in the U.S. raised questions about other potentially weak global financial institutions.

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

Global stock markets sank, with Hong Kong’s main index sliding more than 3%. Market benchmarks in Frankfurt and Paris opened down more than 1%, with European banking stocks dropping more than 2%. Shanghai, Tokyo and Sydney also declined. Wall Street futures were off 1%.

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.

“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 $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. The bank did weather the 2008 financial crisis without assistance, unlike UBS.

Many of its current problems are 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.

Those troubles resurfaced last week after it reported managers had identified “material weaknesses” in its internal controls on financial reporting. Shares plunged Wednesday after its largest investor, the Saudi National Bank, said it wouldn’t invest any more money in the bank to avoid triggering regulations that would kick in if its stake rose about 10%.

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 ($17.3 billion) in 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, amounts to a thunderclap for 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.

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, 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.

Also Sunday, 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.

“Today is one of the most significant days in European banking since 2008, with far-reaching repercussions for the industry,” said Max Georgiou, an analyst at Third Bridge. “These events could alter the course of not only European banking but also the wealth management industry more generally.”

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.

Swiss Finance Minister Karin Keller-Sutter said the Federal Council, the country’s executive branch, “regrets that the bank, which was once a model institution in Switzerland and part of our strong location, was able to get into this situation at all.”

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.

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.

The Swiss government is providing more than 100 billion francs to support the takeover.

Berset said the Federal Council had been discussing Credit Suisse’s troubles since early this year and held urgent meetings last week.

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.

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Sweet reported from New York. Associated Press writers Frank Jordans and Emily Schultheis in Berlin, Barbara Ortutay in Oakland, California, Chris Rugaber in Washington and David McHugh in Frankfurt, Germany, contributed.