Banking stocks tumbled Monday as an initial lull following a historic Swiss-backed UBS Group bailout for troubled Credit Suisse eased and new concerns emerged about the risks of high-yield debt issued by major banks.
As part of the Swiss regulator-controlled package announced Sunday, UBS will pay 3 billion Swiss francs ($3.23 billion) to buy Credit Suisse, which was founded 167 years ago, and suffer losses of up to $5.4 billion. .
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Facing a rapidly spreading crisis of confidence in the financial system, major central banks also tried on Sunday to boost liquidity into the global banking system through a series of coordinated currency swaps to ensure banks receive the dollars they need to run their operations. according to Reuters.
While the moves appear to have boosted investor confidence in early Asian trading, the rally quickly subsided as attention shifted to the big losses some Credit Suisse bondholders would incur from the takeover deal.
According to the deal, Switzerland’s financial regulator decided to value additional $17 billion in prime bonds issued by Credit Suisse at zero, angering some bondholders who thought they would get more protection than what shareholders get in the deal. was announced yesterday Sunday.
Concerns about what the move could mean for additional Tier 1 bonds issued by other banks have added to lingering concerns about a number of risks, including the spread of the crisis to the banking sector, the fragility of local US banks and moral hazard.
Shares of Standard Chartered and HSBC fell more than 6% each in Hong Kong today, Monday, to their lowest level in more than two months, while HSBC faces the possibility of a record one-day drop at six months. The Asian financial sector index (excluding Japan) MSCI fell 1.3%.
“It should be clear that this crisis, after more than a week of banking panic and two government interventions, will not disappear. On the contrary, it has spread all over the world,” said Mike O’Rourke, chief market strategist at Jones. Trading.
“The news of Credit Suisse’s acquisition by UBS is likely to put Credit Suisse’s troubles under the microscope by handing it over to UBS,” he added.
coordinated intervention
A forced banking merger in Switzerland is backed by massive government guarantees that will help prevent what will be one of the biggest bank failures since the collapse of Lehman Brothers in 2008.
Pressure on UBS helped close the deal on Sunday.
“This is a historic day in Switzerland. Frankly, we did not hope for this day,” UBS chairman Colm Kelleher told reporters during a conference call.
“I would like to clarify that, although we were not the initiators of the negotiations, we consider this deal financially attractive for UBS shareholders,” he added.
UBS chief executive Ralph Hammers said many details had yet to be agreed.
“I know there must be questions that we don’t have answers to yet. I understand this and even want to apologize for it,” he continued.
In a global response not seen since the pandemic was at its peak, the Federal Reserve (the U.S. central bank) said it was joining the central banks of Canada, England, Japan, the European Union and Switzerland in a coordinated effort to boost market liquidity. . The European Central Bank has promised to provide loans to support eurozone banks if needed, adding that Switzerland’s help from Credit Suisse was “essential” to restoring calm.
Operations at Credit Suisse’s Asian headquarters appeared to be running as normal on Monday.
persistent problems
The US banking sector is still suffering from some problems as the pressure on bank stocks remains, despite the fact that several large banks have invested $30 billion in First Republic Bank, which was affected by the collapse of the Silicon Valley and Signature banks.
On Sunday, Standard & Poor’s Global downgraded First Republic’s credit rating and said the deposit injection may not solve its liquidity problems.
There are also concerns about what happens next at Credit Suisse and what it means for investors, customers and employees.
A Credit Suisse announcement to employees said that after the acquisition is completed, some wealth management clients may want to transfer some of their assets to another bank if they have concerns about concentrating their assets in one bank.
The deal will also make UBS the only global bank in Switzerland and make the Swiss economy more dependent on one bank.
Chairman of the Board of Directors (UBS) said at a press conference that the bank will reduce the investment banking activities of “Credit Suisse”, which includes thousands of employees around the world. UBS said it expects to save about $7 billion in annual costs by 2027.
Shares of Credit Suisse lost a quarter of their value last week. The bank has been forced to raise $54 billion in central bank funding as it tries to recover from scandals that have eroded investor and customer confidence in it.
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