by Amanda Cooper, Tom Westbrook and John Revill
March 20 (Archyde.com) – Bank stocks and bonds fell on Monday as the Swiss authorities’ orchestrated bailout of Credit Suisse with UBS failed to allay fears about the health of the global banking sector.
In Zurich, Credit Suisse shares fell 56% while those of UBS recovered 2% after losing up to 16% in the morning, investors worried about the long-term benefits of the bank’s takeover of its rival and more broadly prospects for financial institutions in Switzerland, a country long considered a model of banking solidity.
In a rescue operation led by the Swiss authorities, UBS announced on Sunday the takeover for three billion Swiss francs (3.04 billion euros) of its compatriot Credit Suisse, 167, under which it will assume losses up to 5.4 billion dollars.
Investors’ attention was particularly focused on Monday on the blow faced by holders of Credit Suisse bonds in the context of the takeover by UBS.
The Swiss regulatory authorities have indeed decided that the value of Credit Suisse’s “Additional Tier 1” (AT1) securities – a contingent convertible bond riskier than conventional debt – would fall from 16 billion francs to zero.
The decision surprised investors, accustomed to losses being borne first by shareholders.
In a joint statement, the supervisory authority of the European Central Bank, the Single Resolution Board and the European Banking Authority thus recalled on Monday their recommendation, established after the 2008 financial crisis, to have the losses absorbed by the shareholders. in the first place.
Without however succeeding in calming the nervousness on the financial markets. On the stock market, the European banking sector fell by 0.2% after falling to 6% earlier in the morning.
The cost of protecting against a credit event with European banks has also increased. UBS’s Credit Default Swap (CDS) climbed to 153 basis points from 117 basis points, according to data from S&P Global Market Intelligence.
COORDINATED ACTION
Determined to contain the crisis, the main central banks promised over the weekend to provide liquidity in dollars to stabilize the financial system.
In an unprecedented global response since the pandemic, the US Federal Reserve said it joined the central banks of Canada, England, Japan, the European Union and Switzerland as part of a coordinated action to increase market liquidity.
The European Central Bank has pledged to support banks in the euro zone by granting them loans if necessary.
The banking crisis started at the beginning of the month with the bankruptcies of the American banks Silicon Valley Bank (SVB) and Signature Bank, before spreading to Credit Suisse, which was already experiencing significant difficulties due to a succession of crises. and scandals related to its risk management.
The drastic monetary tightening initiated last year by the major central banks to fight galloping inflation is considered to be a trigger for the collapse of SVB and Signature.
Market participants now believe that it is increasingly likely that the Federal Reserve, which will make its monetary policy decision on Wednesday evening, will slow its rate hikes to prevent the turmoil in the banking sector from turning into an economic crisis. worse.
On Wall Street, the concern is mainly focused on regional banks, notably around First Republic Bank which received support of 30 billion dollars via deposits made by several large American banks.
On Sunday, S&P Global downgraded First Republic Bank’s credit rating to junk, saying recent financial support may not be enough to solve the bank’s liquidity problems.
In Europe, the authorities constantly ensure that the banks are solid and sufficiently capitalized.
RECALIBRATING RISK
The combination between UBS and Credit Suisse includes 100 billion Swiss francs (101.2 billion euros) in aid intended for the liquidity of the two groups, the Swiss National Bank (SNB) said.
It averted what could have been one of the biggest bank meltdowns since the collapse of Lehman Brothers in 2008.
However, the Swiss regulator’s decision on AT1 bonds has prompted investors to reconsider the risk surrounding these securities, known as “contingent convertible bonds” or “CoCos” and which can be converted into shares or canceled if the level of a bank’s capital falls below a certain threshold.
The price of AT1 bonds issued by other European banks such as Deutsche Bank, HSBC, UBS and BNP Paribas fell by 10 to 12 cents, according to Tradeweb data.
“There are certain rules that everyone thinks are being followed, and there’s been this very confusing treatment of those obligations,” Mohamed El-Erian, at Allianz, told Britain’s Sky News channel.
“People are recalibrating what is risky,” he added.
BANKING CONCENTRATION
The acquisition of Credit Suisse by UBS will make the latter the only Swiss bank operating on a global scale and will increase the country’s dependence on a single banking institution.
Credit Suisse employees did not hide their concern about their future on Monday, fearing possible cuts linked to the takeover by UBS.
The leader of the Social Democratic Party in the Swiss Parliament, Roger Nordmann, warned on Monday that the operation created “enormous risks” for Switzerland and UBS, and blamed the management of Credit Suisse for the fall of the ‘establishment.
“What happened is terrible for Switzerland’s credibility,” he said.
(Reporting Stefania Spezzati, Oliver Hirt and John O’Donnell in Zurich; with contributions from Lananh Nguyen, Saeed Azhar, Hannah Langby, Julie Zhu, Karin Strohecker and Archyde.com bureaus; writing by Sam Holmes and Toby Chopra; Blandine Hénault for the French version, edited by Kate Entringer)