UBS have agreed to the takeover of Credit Suisse in deal that rocked markets in early trade on Monday.
The deal was completed on Sunday evening and the initial sign in equity futures was positive as thin trade on Sunday focused on the alleviation of system-wide risk related to a Credit Suisse collapse.
However, the terms of the deal and destruction of value in Credit Suisse AT1 bonds sent European banks into a tailspin on Monday.
The deal is a warning to other European banks, and their investors, that governments will not stand for any sign of financial instability and will give no quarter to institutions that pose a systemic risk.
Deutsche Bank was down 6% at the time of writing; Barclays was off 4% and BNP Paribas was 3% weaker. European banks had rallied from their worst levels.
The takeover of Credit Suisse came after pressures mounted on the bank last week and eventually the Swiss government intervened to broker a deal between UBS and Credit Suisse. Their perilous position was evident in the knock down price paid by UBS.
“Credit Suisse was on life support and Swiss authorities believed only a full transplant of the banks divisions into UBS would restore stability to the banking system. But an operation of this magnitude is a big risk for UBS – that’s why it was only willing to pay $3.23 billion, less than half the price its shares valued the bank at on Friday,” said Susannah Streeter, head of money and markets, Hargreaves Lansdown.
The deal was struck after a number of offers from UBS which started at around $1 billion.
The Saudi National Bank, Credit Suisse’s biggest investor, will suffer significant losses as a result of the deal after pumping cash into the bank in recent weeks.