Financial markets are poised for relief on Monday after UBS Group AG agreed to buy Credit Suisse Group AG in a rescue orchestrated by the state and major central banks announced a co-ordinated move to shore up liquidity in the financial system.
In an early sign that risk appetite was set for a bounce, the euro, sterling and the Australian dollar all edged up, data from trading platform EBS and Reuters Dealing showed. Crypto currency bitcoin rose over 5%.
UBS will buy rival Swiss bank Credit Suisse for 3 billion Swiss francs ($3.23 billion) and agreed to assume up to $5.4 billion in losses as it winds down the smaller peer's investment bank after a shotgun merger engineered by Swiss authorities.
In a coordinated global response, central banks including the Federal Reserve, the European Central Bank and the Bank of Japan said they would enhance dollar swap lines, helping calm investors rattled by turmoil in the banking sector.
The euro was last quoted up 0.2 per cent at $1.0684.
"It seems like a very large and decisive intervention. Provided markets don’t sniff out other lingering problems, I’d think this should be pretty positive," said Brian Jacobsen, senior investment strategist at Allspring Global Investments.
"Governments are intent on snuffing out the spark of contagion before the flames get out of control."
The failure of two U.S. banks and a rout in Credit Suisse shares have sent shock waves through markets over the past week, reviving memories of the 2008 financial crisis.
European banks slid almost 12 per cent last week, their biggest weekly drop in just over a year, Japanese banks fell almost 11% - their biggest weekly drop since the March 2020 Covid-induced market turmoil - and U.S. bank shares have notched double-digit losses for two straight weeks .
Without Sunday's Swiss intervention, the risk of further market stress had appeared likely.
At least two major banks in Europe were examining scenarios of contagion possibly spreading in the region's banking sector, two senior executives with knowledge of the deliberations told Reuters earlier on Sunday, before the Credit Suisse deal was announced.
The U.S., UK and Swiss central banks are all scheduled to meet in the week ahead.
The stakes are high for central banks and policymakers who have highlighted resilience of their banking sectors but are also mindful of the need to stem a crisis of confidence that could destabilise financial markets.
Even after Sunday's news, optimism from analysts was laced with caution and some scepticism.
"Switzerland’s standing as a financial centre is shattered - the country will now be viewed as a financial banana republic," said Octavio Marenzi, CEO of Opimas in Vienna.
Others drew attention to the losses likely to be suffered by Credit Suisse junior bondholders.
The decision to write down the value of Credit Suisse's Additional Tier 1 bonds to zero under the deal was "stunning and hard to understand," bondholder Axiom said.
"CS shareholders are essentially wiped out, and some (AT1) bondholders will be wiped out, but the basic functioning of the banking system was protected," said Michael Rosen, chief investment officer at Angeles Investments.