BERN (Reuters) – UBS agreed to buy rival Swiss bank Credit Suisse for 3 billion Swiss francs ($3.23 billion) in stock and agreed to assume up to 5 billion francs ($5.4 billion) in losses, in a shotgun merger engineered by Swiss authorities to avoid more market-shaking turmoil in global banking.

The deal includes 100 billion Swiss francs ($108 billion) in liquidity assistance for UBS and Credit Suisse from the Swiss central bank.

To enable UBS to take over Credit Suisse, the federal government is providing a loss guarantee of a maximum of 9 billion Swiss francs for a clearly defined part of the portfolio, the government said.

This will be activated if losses are actually incurred on this portfolio. In that eventuality, UBS would assume the first 5 billion francs, the federal government the next 9 billion francs, and UBS would assume any further losses, the government said.

Switzerland’s regulator FINMA said that there was a risk that Credit Suisse could have become “illiquid, even if it remained solvent, and it was necessary for the authorities to take action”.

Credit Suisse Additional Tier 1 shares with a nominal value of around 16 billion francs ($17.2 billion) will be written down completely after the Swiss government provided support for UBS’ takeover of Credit Suisse, FINMA said.

The 167-year-old Credit Suisse has been the biggest name ensnared in market turmoil unleashed by the recent collapse of U.S. lenders Silicon Valley Bank and Signature Bank, forcing it to tap $54 billion in central bank funding last week.

“With the takeover of Credit Suisse by UBS, a solution has been found to secure financial stability and protect the Swiss economy in this exceptional situation,” the Swiss central bank said.

Authorities had been scrambling to rescue Credit Suisse, among the world’s largest wealth managers, before financial markets reopened on Monday.

UBS and Credit Suisse are both in a group of the 30 global systemically important banks watched closely by regulators, and Credit Suisse’s failure would ripple throughout the entire financial system.

The announcement came in a make-or-break weekend after some rivals grew cautious in their dealings with the struggling Swiss lender, and its regulators urged it to pursue a deal with UBS.

FINMA, which said it had approved the takeover, said recent measures to stabilize itself were “not enough to restore confidence in the bank, however, and more far-reaching options were also examined.”

The two banks’ fortunes have diverged sharply over the past year. UBS earned $7.6 billion in profit in 2022, while Credit Suisse lost $7.9 billion. Credit Suisse’s shares are down 74% from a year ago, while UBS’s are relatively flat.

The Swiss government said that it was also giving UBS a guarantee of 9 billion Swiss francs “assume potential losses” from assets as part of the transaction.

UBS’s chief executive officer Ralph Hamers and Chairman Colm Kelleher will remain at the helm of the combined bank.

“The transaction reinforces UBS’s position as the leading universal bank in Switzerland,” UBS said.

Executives foreshadowed structural changes in the offing.

Kelleher said it would wrap up running Credit Suisse’s investment bank, but added that it was too early to say anything about potential job cuts.

Kelleher also said they would keep Credit Suisse’s domestic business, despite speculation that it could be spun off amid competition concerns.

Credit Suisse’s Chairman Axel Lehmann called the merger the “best available outcome”.

($1 = 0.9280 Swiss francs)

(Reporting by John Revill, Noele Illien, John O’Donnell, Oliver Hirt and Tom Sims; Editing by Riham Alkousaa, Paul Carrel and Hugh Lawson)

By Pete Schroeder

WASHINGTON (Reuters) -A subsidiary of New York Community Bancorp has entered into an agreement with U.S. regulators to buy deposits and loans from New York-based Signature Bank, which was closed a week ago.

The Federal Deposit Insurance Corporation (FDIC) said the deal would see the subsidiary, Flagstar Bank, assume substantially all of Signature Bank’s deposits, some of its loan portfolios and all 40 of its former branches. Roughly $60 billion of Signature Bank’s loans and $4 billion of its deposits would remain with it in receivership, the agency said.

The Sunday announcement addresses one of two failed banks the FDIC is holding under receivership.

The statement did not refer to the other, Silicon Valley Bank (SVB), a much larger bank that regulators took over two days before Signature.

Signature had $110.36 billion in assets, whereas SVB had $209 billion.

Reuters reported earlier on Sunday that the FDIC would relaunch its auction for SVB’s assets after failing to attract buyers for the whole bank.

Under the arrangement for Signature Bank assets, Flagstar will buy $12.9 billion of loans at a discount of $2.7 billion.

The FDIC estimated the deal would cost its Deposit Insurance Fund approximately $2.5 billion. The agency previously reported that the fund had held $128.2 billion at the end of 2022.

(Reporting by Pete Schroeder; Editing by Christopher Cushing and Bradley Perrett)

By Yoruk Bahceli and Lucy Raitano

LONDON (Reuters) -European bank shares rose from four-month lows on Monday, following the state-backed rescue of Credit Suisse by UBS, while bank bonds remained under pressure after the merger deal wiped out some bondholders.

The Credit Suisse rescue has shaken the European banking sector and fears of wider fallout remain. Central banks stepped in to help to calm the turmoil, but the cost of insuring against bank defaults continued to climb, with UBS credit default swaps rising on Monday to levels last seen more than a decade ago.

The Swiss authorities’ handling of the Credit Suisse rescue has upended the markets’ expectation that shareholders would take a bigger hit than bond investors in such a scenario.

Under the Credit Suisse rescue deal, 16 billion Swiss francs worth of Credit Suisse Additional Tier 1 debt will be written down to zero on the orders of the Swiss regulator.

So such bonds, known as AT1s or “CoCos” (contingent convertibles, were at the centre of the sell-off in Europe.

These bonds can convert into equity or be written off if a bank’s capital levels fall below a certain threshold, depending on the terms of each individual instrument.

The write-down to zero at Credit Suisse will produce the largest loss in the $275 billion AT1 market to date, dwarfing the 1.35 billion euros ($1.44 billion) bondholders of Spain’s Banco Popular lost in 2017.

Bid prices on AT1 bonds from banks, including Deutsche Bank, HSBC, UBS and BNP Paribas, were among those under pressure on Monday. They recovered marginally but were still down 6-11 points on the day, sending yields sharply higher, data from Tradeweb showed.

A UBS AT1 bond callable in January 2024 was trading at a yield of 27%, up from 12% on Friday, demonstrating how much more costly this type of debt could become in the wake of the Credit Suisse rescue.

“AT1s suffer from a major crisis of confidence now,” said Marco Pabst, group chief investment officer at Arbion.

“They are hard to value in the best of days and have just become an even more problematic asset class today. Investors who want a similar risk profile could just buy the stock and a more senior bond,” Pabst said.

BANK SHARES TURN POSITIVE

European bank stocks fell as much as 6% in early trading on Monday, hitting their lowest level since November, but then turned positive.

Analysts attributed the recovery partly to dip-buying and short-covering, but also to a statement by European supervisors which said owners of AT1 debt would only suffer losses after shareholders had been wiped out, unlike at Credit Suisse.

“The bounce in bank stocks today is also more of a short-term relief rally that the CS affair is now finished but I doubt this will last long,” Pabst said. “With the rate hike cycle likely over, the prospects for banks just deteriorated significantly,” he said, referring to expectations that central banks are nearing the end of their moves to raise interest rates.

Overall, bank debt remained under pressure, with the cost of insuring exposure to the debt rising in the credit default swaps (CDS) market.

UBS CDS widened 63 basis points to 180 bps – levels last seen more than a decade ago. Among the other banks, Deutsche Bank and UniCredit saw some of the sharpest increases at 20 bps and 13 bps respectively, S&P Global Market Intelligence data showed.

CONTAGION RISK

The wipeout of AT1 bonds in the Credit Suisse rescue has alerted fixed income investors to the risks of investing in these instruments.

“The specific CS situation is mostly bedded down now, but it’s no time for complacency,” said Wolfgang Felix, senior analyst at credit firm Sarria Limited. “Investors realise that these bonds contractually circumvent the concept of absolute priority to their own disadvantage.”

“So the mob is angry and scared and is looking for the next best target. The focus is moving to other issuers of CoCos, which includes most of Europe’s larger banks. It’s not a good situation.”

Funds that track AT1 debt also fell sharply.

Invesco’s AT1 Capital Bond exchange-traded fund was last down 6%, having been over 10% lower earlier. WisdomTree’s AT1 CoCo bond ETF was indicated 9% lower.

At Credit Suisse, the bank’s AT1 bonds were bid as low as 1 cent on the dollar on Monday as investors braced for the wipeout.

(Reporting by Yoruk Bahceli, Lucy Raitano, Chiara Elisei, Amanda Cooper, Danilo Masoni; Editing by Amanda Cooper and Jane Merriman)

By Lindsay Dunsmuir

(Reuters) -Traders and economists remain split on whether the Federal Reserve will raise its benchmark policy rate on Wednesday, as more actions by the world’s major central banks to stem banking strains and the fallout from the takeover of Credit Suisse kept markets on edge.

The U.S. central bank will begin its two-day policy meeting on Tuesday as policymakers consider whether still too-hot inflation merits an interest rate hike or whether turmoil in financial markets outstrips those concerns. The Fed’s current target range is 4.5%-4.75%.

“I don’t think the Fed has any good options here,” said Tim Duy, chief U.S. economist at SGH Macro Advisors. “The risk is allowing inflation to become even more embedded versus the risk of aggravating a broader banking crisis.”

Prices of Fed funds futures reflected a roughly 70% probability of a quarter-percentage point rate hike on Monday versus about a 30% chance of no change, a slight firming in expectations compared to the end of last week.

Market pricing has swung wildly over the past 10 days with investors going from expecting a bigger half-point rate rise before banking stresses emerged to at one point seeing rates unchanged. Among economists, those who predict a quarter-point rise do so without ruling out the potential for a pause.

The Fed usually likes to telegraph the expected outcome of its policy meetings in order not to unsettle financial markets but the fast pace of events in the past 10 days, in which two U.S. regional banks collapsed and Credit Suisse was rescued by larger rival UBS at the weekend, has upended those norms.

On Sunday, the Fed, as part of a coordinated action, offered daily currency swaps to banks in Canada, Britain, Japan, Switzerland and the euro zone in order to ease funding stress in global markets, although banks borrowed only token amounts on Monday. The Fed also has already created an emergency liquidity backstop for U.S. banks.

The tumult has occurred during the central bank’s premeeting blackout period that prevents officials from offering public clarity on their assessment of the situation.

TO HIKE OR NOT TO HIKE?

“Barring a catastrophic collapse of the banking sector between today and Wednesday — one that reverberates globally — they will be focused on developments in the economy, which currently supports more policy tightening,” said Rubeela Farooqi, chief U.S. economist at High Frequency Economics, who forecasts a quarter percentage point rate increase.

She pointed to a string of recent economic data, including a key inflation report last week, that suggest inflationary pressures are far from tamed, and expects the Fed this week to lift its median projection for the funds rate at year-end to 5.4% from 5.1% at December’s meeting.

Inflation, while off its highs, is still running at 5.4% by the Fed’s preferred measures, far above the 2% target rate.

The Fed has also been shown a template of sorts in recent days with the European Central Bank last Wednesday sticking with a 50-basis point rate increase, judging it could firewall its monetary policy actions to fight high inflation from those needed to calm fears about financial stability.

Analysts at Goldman Sachs, however, predict a pause at the meeting this week owing to the current volatility and helped by a sharp drop in near-term inflation expectations. The investment bank then expects three more 25 basis point hikes in May, June, and July, with the policy rate peaking in the 5.25-5.5% range.

“While policymakers have responded aggressively to shore up the financial system, markets appear to be less than fully convinced that efforts to support small and midsize banks will prove sufficient,” they wrote. “We think Fed officials will therefore share our view that stress in the banking system remains the most immediate concern for now.”

(Reporting by Lindsay Dunsmuir; Editing by Andrea Ricci)

ZURICH (Reuters) – UBS can handle the risks from taking over Swiss rival bank Credit Suisse, UBS Chief Executive Ralph Hamers told broadcaster SRF.

In a package orchestrated by Swiss regulators on Sunday, UBS will pay 3 billion Swiss francs ($3.23 billion) for 167-year-old Credit Suisse and assume up to $5.4 billion in losses.

Hamers, who will lead the combined entity as chief executive, said UBS would be able to manage the risks that could emerge from a so-called superbank.

“We have a very good capital ratio at UBS, and we also have a very good liquidity position. So we have contained the risks in the markets,” Hamers said in the interview broadcast early on Monday.

“The second step for us is to transform CS’s investment bank into an investment bank like UBS has. We call this a capital-light investment bank. In doing so, we are not taking so much risk.”

He said he did not currently have any figures regarding lay-offs at Credit Suisse, although there would always be cost savings.

Still, there were no definite plans at present, he said.

“There are certainly opportunities and chances for growth. The many employees – CS has 50,000 worldwide – also have a new future together with us. And together we can build an even more beautiful bank.”

The intended takeover would bring security and stability to the Swiss financial market and also for Credit Suisse clients, he added.

“The takeover means that we are bringing back stability and security for CS clients,” Hamers said. “But also that we are upholding the reputation of the Swiss financial centre.”

(Reporting by John Revill and Katharina Loesche; Writing by John Revill; Editing by Bradley Perrett)