UBS has agreed to buy its smaller rival Credit Suisse for $3.2 billion to try to avoid more turmoil in global financial markets, Swiss President Alain Berset announced on Sunday night.
The deal is “one of great breadth for the stability of international finance", Mr Berset said.
"An uncontrolled collapse of Credit Suisse would lead to incalculable consequences for the country and the international financial system."
An emergency ordinance that allows the merger to go through without the approval of shareholders was cleared by the Swiss Federal Council, a seven-member governing body that includes Mr Berset.
Credit Suisse chairman Axel Lehmann called the deal “a clear turning point”.
“It is a historic, sad and very challenging day for Credit Suisse, for Switzerland and for the global financial markets,” Mr Lehmann said.
He said the focus is now on the future and the 50,000 Credit Suisse employees, 17,000 of whom are in Switzerland.
UBS chairman Colm Kelleher hailed the “enormous opportunities” that emerged from the takeover, and highlighted his bank’s “conservative risk culture”.
It was a subtle swipe at a Credit Suisse culture, which has been known for more swashbuckling, riskier gambles on bigger returns.
Mr Kelleher said the combined group would create a wealth manager with more than $5 trillion in total invested assets.
Mr Berset said the council had agreed to guarantee 150 billion Swiss francs ($162 billion) of liquidity to Credit Suisse, well beyond the 50-billion Swiss franc figure that was announced publicly. But that did not appear to be enough.
“We noted that the outflows of liquidity and the volatility of the markets demonstrated that necessary confidence could no longer be restored, and a rapid solution guaranteeing stability was essential.”
Swiss Finance Minister Karin Keller-Sutter said the council regretted "that the bank, which was once a model institution in Switzerland and part of our strong location, was able to get into this situation at all".
The combination of the two biggest and best-known Swiss banks, each dating to the mid-19th century, leaves Switzerland on the cusp of having a single national champion in banking.
UBS officials said they planned to sell off parts of Credit Suisse, or reduce the size of the bank over the coming months and years.
The Swiss central bank has agreed to provide a loan of 100 billion Swiss francs backed by a federal default guarantee to support the deal, which is expected to be completed by the end of the year.
Mr Berset said the Federal Council, Switzerland’s executive branch, had already been discussing a long-troubled situation at Credit Suisse since the start of the year.
He said it held urgent meetings over the past four days amid increasing concerns about its financial health, which caused major drops in its stock price and raised the spectre of the 2008 financial crisis.
Investors and banking industry analysts were still studying the deal, but one analyst was disappointed because of the reputational damage the deal might have on Switzerland’s image as a global banking centre.
“A country-wide reputation with prudent financial management, sound regulatory oversight and, frankly, for being somewhat dour and boring regarding investments, has been wiped away,” said Octavio Marenzi, chief executive of consulting firm Opimas.
Mr Marenzi said he expected Switzerland’s direct democracy governmental model was likely to result in court and ballot challenges for this deal, potentially leading to more chaos.
Credit Suisse is designated by the Financial Stability Board, an international body that monitors the global financial system, as one of the world’s globally systemic important banks.
This means regulators believe its uncontrolled failure would lead to ripples throughout the financial system not unlike the collapse of Lehman Brothers 15 years ago.
The deal follows the collapse of two large US banks last week, which spurred a frantic, broad response from the US government to prevent any further bank panics.
Global financial markets have been on edge since Credit Suisse's share price began plummeting this week.
Many of Credit Suisse’s problems are unique and do not overlap with the weaknesses that brought down Silicon Valley Bank and Signature Bank, the failures of which led to a significant rescue effort by the Federal Deposit Insurance Corporation and the Federal Reserve.
As a result, their downfall does not necessarily indicate the start of a financial crisis similar to what occurred in 2008.
The deal caps a highly volatile week for Credit Suisse, most notably on Wednesday when its shares plunged to a record low after its largest investor, the Saudi National Bank, said it would not invest any more money into the bank to avoid regulations that would be activated if its stake rose about 10 per cent.
On Friday, shares dropped 8 per cent to close at 1.86 francs ($2) on the Swiss exchange. The stock has seen a long downward slide: it traded at more than 80 francs in 2007.
Its current troubles began after Credit Suisse reported on Tuesday that managers had identified “material weaknesses” in the bank’s internal controls on financial reporting as of the end of last year.
While smaller than its Swiss rival UBS, Credit Suisse still wields considerable influence, with $1.4 trillion assets under management.
The firm has significant trading desks around the world, caters to the rich and wealthy through its wealth management business, and is a major adviser for global companies in mergers and acquisitions.
Credit Suisse did not need government assistance in 2008 during the financial crisis, while UBS did.
Despite the banking turmoil, the European Central Bank on Thursday approved a large, half-percentage point increase in interest rates to try to curb stubbornly high inflation, saying Europe’s banking sector is “resilient", with strong finances.
ECB President Christine Lagarde said the banks “are in a completely different position from 2008” during the financial crisis, partly because of stricter government regulation.
The Swiss bank has been pushing to raise money from investors and introduce a new strategy to overcome an array of troubles, including bad investments on hedge funds, repeated shake-ups of its top management and a spying scandal involving UBS.
The Bank of England welcomed moves by the Swiss authorities to broker the takeover on Sunday, indicating it would support approval of the deal. It said the British banking system was well funded.
"We welcome the comprehensive set of actions set out by the Swiss authorities today in order to support financial stability," the BoE said, adding it would support international regulators in implementing the actions.
"The UK banking system is well capitalised and funded, and remains safe and sound."
Both Swiss banks have units based in Britain which are regulated by the Financial Conduct Authority and the Bank of England's Prudential Regulation Authority.
The FCA said it was "minded to approve the actions announced today in relation to the entities which fall under its regulatory and supervisory remit".
The BoE's statement coincided with similar ones from the European Central Bank and the US Federal Reserve.
“The UK government welcomes the steps taken today by the Swiss authorities in relation to Credit Suisse to support financial stability," said the British Chancellor of the Exchequer, Jeremy Hunt.
“The Bank of England has confirmed the UK banking system remains safe, sound and well capitalised.”