UBS is set to buy Credit Suisse for $3.2 billion. The megadeal could make the banking crisis worse.

• UBS has agreed to acquire Credit Suisse for $3.2 billion, as the banking crisis rages on.
• The Swiss megadeal has implications for US banks, markets, the economy, and interest rates.

UBS has agreed to acquire Credit Suisse for 3 billion Swiss francs ($3.2 billion). The government-brokered deal aims to calm jittery investors and depositors, and halt the burgeoning banking crisis before it spirals out of control.

The planned mega-merger is just the latest development in a dramatic couple of weeks. Three US banks have folded, regulators have rushed to contain the fallout with emergency measures, and Warren Buffett has reportedly spoken to senior White House officials about potentially stepping in to save the day.

The Swiss agreement has major implications for US investors. They range from its impact on financial markets and the banking sector, to its potential effect on the American economy and interest rates.

Here's a closer look at what the deal could mean.

What pressures led to the deal?

Credit Suisse has faced a series of scandals in recent years, ranging from bad bets to corporate espionage. Recently, the Swiss banking giant revealed there were "material weaknesses" in its financial reporting.

Investors got worried it could be caught up in the turmoil driven by the US bank failures. Their reaction tanked its stock and bonds, and drove up the cost of insuring against the bank defaulting on its debt.

Swiss authorities determined the lender was at risk, and pushed UBS to acquire it. The Swiss National Bank has agreed to lend UBS the equivalent of $108 billion to help it see through the merger.

Meanwhile, Switzerland's financial regulator has wiped out $17 billion worth of Credit Suisse bonds and removed the need for UBS shareholders to approve the transaction.

What does it say about the threat to banks right now?

Swiss officials' involvement in the deal, and the substantial sweeteners they've provided to make it happen, suggest they're deeply concerned about the ongoing banking crisis.

Those growing worries are reflected in the concerted effort taken by the US Federal Reserve and other central banks at the weekend. They've come together to help foreign banks get access to US dollars by offering swap operations every day through April, rather than once a week.

The mega-takeover also has clear parallels with the banking deals sealed during and after the 2008 financial crisis. That's when JP Morgan scooped up Bear Stearns and Washington Mutual, Bank of America acquired Merrill Lynch, and Wells Fargo bought Wachovia.

If more deals lead to more consolidation in the banking industry, that could reflect pressures on smaller lenders are growing, forcing them to seek safety in the arms of larger, wealthier peers.

What sparked the concerns about banks?

The current turmoil was touched off by Silicon Valley Bank, Signature Bank, and Silvergate all shutting down in the past couple of weeks.

In SVB's case, it ran into trouble because it had a high percentage of uninsured deposits. It also invested in long-dated bonds that have plunged in price over the past year, as the Fed hiked interest rates.

The bank's cash-hungry, venture-capital-backed customers rushed to pull their money out after SVB sold bonds at a loss and tried to raise fresh capital. They were worried the bank could fail, and they would lose most of their cash.

The wave of withdrawals overwhelmed the bank, spurring the Federal Deposit Insurance Corp. (FDIC) to take control and later guarantee all of its deposits. The FDIC also took the same action at Signature, while Silvergate voluntarily closed down.

Meanwhile, the Fed established an emergency lending program to help banks easily access capital to weather any further pressures.

The banks' challenges, and authorities' efforts so far in response to them, made investors sour on global banks, paving the way for UBS to acquire Credit Suisse.

How could the Swiss deal affect markets?

Governments worldwide will be hoping the UBS takeover of Credit Suisse will calm fears about the chance of more bank failures. The Swiss government's "whatever it takes" approach could also help restore faith in the financial system.

But investors could interpret the rushed deal — seen as a bailout by some — as a sign of desperation in the face of a real threat to vulnerable banks.

On Monday morning, UBS shares slumped 7% and the Euro Stoxx Bank Index slid 1%. That suggest the Swiss bank's shareholders aren't impressed by the deal terms, and that the market isn't reassured about the prospects for other lenders.

What does the transaction mean for the US economy and interest rates?

The UBS-Credit Suisse deal may be a mixed blessing for Americans. It could help to cool inflation, but might also raise the odds of a recession.

US inflation spiked to a 40-year high last year, spurring the Fed to lift interest rates from nearly zero to upwards of 4.5% over the past 12 months — and it could raise them again at its meeting this week.

Rate hikes help curb price increases as they make borrowing more costly and encourage people to save instead of spend. But at the same time, they can dampen consumer demand and weigh on the prices of stocks and other assets. They can also lift the risk of a recession by pushing unemployment higher.

Americans could see the UBS-Credit Suisse deal as evidence of serious underlying problems in banks and the wider financial system.

As a result, they might become more conservative in their spending, investing, and hiring — and that might not change until they're certain more banks aren't going to fail. They need to be reassured they aren't going to lose their jobs or suffer a big blow to their retirement savings.

That could help the Fed in its inflation fight, but might pose to a risk to financial stability and employment — two other priorities for the central bank.

Fed officials could face a situation where they want to hike rates further to crush inflation, but doing so could heap further pressure on lenders and exacerbate the banking crisis, increasing the risk of a broader economic downturn.

What does this all mean for the current banking crisis?

American investors may well see the UBS-Credit Suisse deal as evidence of a mad scramble to shore up liquidity among lenders and combine different banks.

Also, they may view it as a harbinger of more bad news to come — the first in a wave of tie-ups. That's especially a risk given how things played out during the financial crisis.

That means US stockpickers and bondholders will be watching for more red flags at domestic banks. They're also likely to keep a close eye on what the authorities do next, to gauge just how serious the current challenges are.

Without an unlimited blanket guarantee on bank deposits, it's easy to imagine customers will be wary that more banks could fail. They could seek to park their funds in safer places.

The turmoil could weaken inflationary pressures by leading banks to tighten their lending, and by confidence among consumers and businesses.

But it could also mean the Fed faces a double whammy: stubborn inflation against a backdrop of fragile growth and employment.

That would give it an impossible choice: halt its interest rate hikes and let prices keep rising, or march foward with rate increases that threaten to ramp up pressure on banks and drag the economy into a recession.

In short, there are several reasons to think the UBS-Credit Suisse merger could spook investors and exacerbate the banking crisis.