Financial markets were poised for relief on Monday after UBS Group AG (UBSG.S) agreed to buy Credit Suisse Group AG (CSGN.S) in a rescue orchestrated by the state, while 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.
Meanwhile, in a coordinated global response, central banks including the Federal Reserve said they would enhance dollar swap lines, helping calm investors rattled by turmoil in the banking sector.
"To improve the swap lines’ effectiveness in providing U.S. dollar funding, the central banks currently offering U.S. dollar operations have agreed to increase the frequency of seven-day maturity operations from weekly to daily," the Fed said in a statement issued alongside announcements from the Bank of Canada, Bank of England, Bank of Japan, European Central Bank and Swiss National Bank.
"Given the timing and sequence of events this move to offer overseas USD liquidity is less of a bad signal and more like an effort to instill confidence with the added benefit of watching the situation for USD demand on a daily basis," said George Goncalves, head of U.S. macro strategy at MUFG.
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% last week, their biggest weekly drop in just over a year (.SX7P), Japanese banks fell almost 11% their biggest weekly drop since the March 2020 COVID-induced market turmoil (.IBNKS.T) - and U.S. bank shares have notched double-digit losses for two straight weeks (.SPXBK).
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 global financial system is still at great risk, and central bankers are showing they learned lessons from the global financial crisis and are trying to get in front of this," said Edward Moya, senior market analyst at OANDA. "More banks are at danger and coordinated action might buy some banks some time."
