Swiss authorities said on Sunday that the deal was done by UBS to buy Swiss bank Credit Suisse in an effort to avoid market-shaking turmoil in global banking.
The Swiss central bank will supply substantial liquidity to the merged bank, it said at a news conference in Bern. It said the deal was a solution to secure financial stability and protect the Swiss economy in an exceptional situation.
Early early trading prices of the euro suggest that the single currency was rising on the back of the news. The euro was quoted at around $1.07, up around 0.4% on the day.
European banks fell by almost 12%, their biggest weekly drop in just over a year. Japanese banks fell more than 11%, their biggest weekly drop since March 2020 due to market turmoil caused by COVID. The US bank shares have lost double-digit losses for the past two weeks.
The two-year U.S. Treasury yield fell 74 bps, their biggest weekly drop since 1987. The German bond yields fell 64 bps - their biggest weekly drop since 1992.
They've seen a problem, they're dealing with it and that's a positive sign for markets.
It doesn't mean that it is over, but there's no need to panic. The relief for the market is that systemic risk is contained. The early signs are that it is steading things a bit, as you would expect. FX pricing is starting to filter through and it's likely that Wellington is trading in New Zealand - the pound and the Aussie dollar are a bit firmer, as it is the most illiquid market in the world.
The FX market is singing a risk-off song that seems like a large and decisive intervention, as the yen is softer to a similar degree. If markets don't sniff out other lingering problems, I think this should be pretty positive. Governments are intent on snuffing out the spark of contagion before the flames get out of control.
The key is consistency: their actions set a precedent. The financial crisis was caused by the inconsistent treatment of Lehman Brothers versus Bear Stearns. We have to wait to see how US officials treat regional banks. There will still be questions about regional banks in the U.S. and whether there are hidden risks in European banks, if the CS UBS deal is good enough to improve sentiment. Today is one of the most significant days in European banking since 2008, with far-reaching repercussions for the industry. These events could alter the course of not only European banking but the wealth management industry as a whole.