A historic government-brokered arrangement between UBS Group and Credit Suisse Group was made in an effort to stem the development of a confidence crisis that had begun in the world's financial markets.

A historic government-brokered arrangement between UBS Group and Credit Suisse Group was made in an effort to stem the development of a confidence crisis that had begun on the world's financial markets.

In an all-share transaction that involves substantial government guarantees and liquidity protections, the Swiss bank is paying 3 billion francs ($3.2 billion) for its competitor. The share price represented a 99% drop from Credit Suisse's 2007 peak.

Although the government provides a 9 billion franc guarantee for any losses from the assets UBS is acquiring, the Swiss National Bank is providing UBS with a 100 billion franc liquidity aid. A 16 billion franc worth of AT1 bonds issued by Credit Suisse would lose value, according to regulator Finma, to guarantee that private investors pay cover the expenses.

In the opening hours of trade in Zurich, UBS fell 8.8%, while Credit Suisse fell nearly 64%, valuing the company at roughly 2.71 billion Swiss francs.

The agreement, reached in urgently scheduled crisis negotiations over the weekend, aims to handle customer withdrawals as well as a significant decline in Credit Suisse's stock and bonds during the previous week as a result of the failure of smaller American institutions. A market drama that threatened to send counterparties running and might have consequences for the whole sector was not resolved by a liquidity backstop provided by the Swiss central bank mid-week.

The agreement was praised by the European Central Bank, the Federal Reserve, and the Treasury Department. Because both lenders have significant business in the US, US regulators have been collaborating with their Swiss colleagues, according to a previous Bloomberg article. Before markets in Asia reopened, authorities desired a compromise. According to a statement released by Credit Suisse on Sunday, the deal should be finished by the end of the year, if not sooner.

As there was limited time for thorough research and because Credit Suisse had difficult-to-value assets on its books that UBS intended to wind down, the government's loss guarantee was required, according to UBS Chairman Colm Kelleher. In the event of losses, UBS would be responsible for the first 5 billion Swiss francs and the federal government for the remaining 9 billion.

Kelleher claimed it was too early to estimate the number of job losses, but UBS suggested it would be high. The corporation said in a statement Sunday it intends to decrease the merged company's annual cost base by more than $8 billion by 2027. The costs for Credit Suisse last year came to about half of that.

In an internal message, Credit Suisse stated that it will investigate whether positions could be affected and "would try to continue to give severance in line with market practice." Bonuses will continue to be paid on March 24 and payroll arrangements will not be altered, according to the memo.

Even though it avoided a rescue during the financial crisis, Credit Suisse has suffered in recent years due to numerous scandals, managerial moves, and legal problems. As worries about its financial stability grew in the final three months of last year, clients withdrew more than $100 billion in assets, and the outflows persisted even after it touched shareholders in a 4-billion-franc capital raising.

Swiss Finance Minister Karin Keller-Sutter stated that this was the only option and that it was necessary to stabilise both the Swiss and global financial markets. She said that Credit Suisse could no longer survive on its own.

(Bloomberg.com, Reuters.com)