UBS AG was mulling a takeover of its embattled Swiss peer Credit Suisse on Saturday, sources said, which could allay fears that an unfolding crisis at the bank might destabilise the global financial system.
The 167-year-old Credit Suisse is the biggest name ensnared in the turmoil unleashed by the collapse of US lenders Silicon Valley Bank and Signature Bank over the past week, spurring a broad-based loss in investor confidence globally.
Both US and European banking executives and regulators have taken extraordinary measures to shore up the industry to try to restore confidence. The Biden Administration moved to backstop consumer deposits while the Swiss central bank lent billions to Credit Suisse to stabilize its shaky balance sheet.
UBS was under pressure from the Swiss authorities to carry out a takeover of its local rival to get the crisis under control, two people with knowledge of the matter said. The plan could see the Swiss government offer a guarantee against the risks involved, while Credit Suisse's Swiss business could be spun off.
UBS, Credit Suisse and Switzerland's financial regulator FINMA declined to comment.
The Financial Times said the three were rushing to finalise a merger deal as soon as Saturday evening, citing people familiar with the matter.
US authorities are involved, working with their Swiss counterparts to help broker a deal, Bloomberg News reported, also citing those familiar with the matter.
Credit Suisse shares lost a quarter of their value in the last week. It was forced to tap $54 billion in central bank funding as it tries to recover from a string of scandals that have undermined the confidence of investors and clients. This made it the first major global bank to take up an emergency lifeline since the 2008 financial crisis.
The company ranks among the world's largest wealth managers and is considered one of 30 global systemically important banks whose failure would ripple throughout the entire financial system.
The banking sector's fundamentals are stronger and the global systemic linkages are weaker than during the 2008 global financial crisis, Goldman analyst Lotfi Karoui wrote in a late Friday note to clients. That limits the risk of a "potential vicious circle of counterparty credit losses," Karoui said.
"However, a more forceful policy response is likely needed to bring some stability," Karoui said. The bank said the lack of clarity on Credit Suisse's future will pressure the broader European banking sector.
A senior official at China's central bank said on Saturday that high interest rates in the major developed economies could continue to cause problems for the financial system.
There were multiple reports of interest for Credit Suisse from other rivals. Bloomberg reported that Deutsche Bank was looking at the possibility of buying some of its assets, while US financial giant BlackRock denied a report that it was participating in a rival bid for the bank.
INTEREST RATE RISK
The failure of California-based Silicon Valley Bank brought into focus how a relentless campaign of interest rate hikes by the US Federal Reserve and other central banks - including the European Central Bank this week - was pressuring the banking sector. SVB and Signature's collapses are the second- and third-largest bank failures in US history behind the demise of Washington Mutual during the global financial crisis in 2008.
Banking stocks globally have been battered since SVB collapsed, with the S&P Banks index falling 22%, its largest two weeks of losses since the pandemic shook markets in March 2020.
Big US banks threw a $30 billion lifeline to smaller lender First Republic, and US banks altogether have sought a record $153 billion in emergency liquidity from the Federal Reserve in recent days.
This reflects "funding and liquidity strains on banks, driven by weakening depositor confidence," said ratings agency Moody's, which this week downgraded its outlook on the US banking system to negative.
While support from some of the titans of US banking prevented First Republic's collapse, investors were startled by disclosures on its cash position and how much emergency liquidity it needed.
In Washington, focus has turned to greater oversight to ensure that banks and their executives are held accountable.
US President Joe Biden called on Congress to give regulators greater power over the sector, including imposing higher fines, clawing back funds and barring officials from failed banks.