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 (UBSG.S) will pay 3 billion Swiss francs ($3.2 billion) for 167-year-old Credit Suisse Group AG <CSGN.S>, 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 5% higher, bouncing from a 16% 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 (.SX7P) while shares in U.S. financial giants Citigroup (C.N) and JPMorgan Chase (JPM.N) rose 1.2% and 0.7% 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 (SBNY.O) earlier this month.
Policymakers from Washington to Europe have asserted that the current turmoil is different than the global financial crisis 15 years ago as banks are better capitalised 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.
To prevent the banking jitters from snowballing into a bigger crisis, top central banks promised over the weekend to provide dollar liquidity to stabilise 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 collapse 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 (FRC.N), 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% in early U.S. dealing on Monday.
Other regional U.S. lenders largely bucked the trend. PacWest Bankcorp (PACW.O) jumped 17% after saying deposit outflows had stabilised and its available cash exceeded total uninsured deposits.
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.
(Reuters)
