Shares rise after Credit Suisse rescue eases financial crisis

The deal to buy Credit Suisse will make UBS Switzerland’s only global bank and the Swiss economy more dependent on a single lender.

U.S. banking stocks rose on Monday and Europe’s lenders recovered from a sharp early sell-off after UBS Group’s state-backed takeover of Credit Suisse appeared to close off one source of worry for the global banking sector.

In a package engineered by Swiss regulators on Sunday, UBS Group AG will pay three billion Swiss francs (US$3.2 billion) for 167-year-old Credit Suisse Group AG, which was once worth more than $90 billion.

Bonds issued by major European banks fell after some bondholders were wiped out in the deal, but UBS shares were five per cent higher, bouncing from a 16 per cent slump triggered by concerns about the long-term benefits of the deal and the outlook for Switzerland, once considered a paragon of sound banking.

European bank shares inched into positive territory while shares in U.S. financial giants Citigroup and Jpmorgan Chase rose 1.2 per cent and 0.7 per cent, respectively.

Investor focus had shifted to the massive blow some Credit Suisse bondholders will take, a new worry in a rolling banking sector crisis sparked by the collapse of midsize-u.s. lenders Silicon Valley Bank (SVB) and Signature Bank earlier this month.

Policy-makers from Washington to Europe have asserted that the current turmoil is different than the global financial crisis 15 years ago as banks are better capitalized and funds more easily available.

Euro zone banking supervisors tried to stop a rout in the market for convertible bank bonds on Monday, saying owners of this type of debt would only suffer losses after shareholders have been wiped out — unlike at Credit Suisse, whose main regulators are outside the currency bloc.

The cost of insuring exposure to the debt of Europe’s lenders rose, with UBS’S credit default swap widening to 153 basis points from 117 bps, S&P Global Market Intelligence data showed.

CO-ORDINATED ACTION

To prevent the banking jitters from snowballing into a bigger crisis, top central banks promised over the weekend to provide dollar liquidity to stabilize the financial system.

In a global response not seen since the height of the pandemic, the U.S. Federal Reserve said it had joined central banks in Canada, Britain, Japan, the euro zone and Switzerland in a co-ordinated action to enhance market liquidity.

The Fed’s relentless rate hikes to quash inflation were seen as a trigger for the collaspse of SVB and Signature, and traders have now increased their bets that the central bank will pause its hiking cycle on Wednesday to try to ensure financial stability.

There are still worries despite several large banks depositing $30 billion into First Republic Bank, the lender currently drawing the most concern from U.S. investors.

S&P Global downgraded First Republic’s credit ratings deeper into junk on Sunday, saying the deposit infusion may not solve its liquidity problems. Its shares fell 14 per cent in early U.S. dealing on Monday.

Other regional U.S. lenders largely bucked the trend. Pacwest Bankcorp jumped 17 per cent after saying deposit outflows had stabilized and its available cash exceeded total uninsured deposits.

RECALIBRATING RISK

The shotgun Swiss banking marriage is backed by a massive government guarantee, helping prevent what would have been one of the largest banking collapses since the fall of Lehman Brothers in 2008.

However, the Swiss regulator decided Credit Suisse’s additional tier-1 (AT1) bonds with a notional value of $17 billion will be valued at zero, angering some holders of the debt who thought they would be better protected than shareholders.

AT1 bonds — a $275-billion sector also known as “contingent convertibles” or “Coco” bonds — can be converted into equity or written off if a bank’s capital level falls below a certain threshold.

“There are certain rules that everybody thinks are being followed, and there’s been this one very puzzling treatment of these bonds,” Allianz advisor Mohamed El-erian told Britain’s Sky News.

“People are recalibrating what they thought the risk was,” he said.

QUESTIONS FOR UBS

The deal to buy Credit Suisse will make UBS Switzerland’s only global bank and the Swiss economy more dependent on a single lender.

One man who walked out of Credit Suisse’s London office on Monday told Reuters that the atmosphere inside the building was “business as usual.”

“When you work in banking, these things happen, and there’s no point worrying,” he said, refusing to give any further details.”

Other staff in Hong Kong and Singapore fretted about retrenchments and retaining business.

Switzerland’s two biggest political parties sharply criticized the takeover, saying huge state support — which could add up to $280 billion — created enormous risks for the country.

“What has happened is terrible for the credibility of Switzerland,” said Roger Nordmann, leader of the Social Democrats in the Swiss parliament.

“It’s a warning shot for Switzerland about having banks which are just too big.”