20 March 2023

Bank shares slide as Credit Suisse rescue takeover shakes traders

20 March 2023

Banking stocks in London slid in value on Monday after an emergency rescue deal for Credit Suisse sparked volatility in the financial markets.

Downing Street and the Bank of England both said the UK’s banking system remains “safe” in an effort to reassure investors and businesses.

The FTSE 100 dropped by almost 2% to its lowest since November on Monday but recovered back to positive territory during a choppy session, as traders and investors tried to digest the situation.

By 2pm in London, the FTSE 100 was around 0.6% higher for the session, with early session gains seen also on the Dow Jones and S&P 500 on Wall Street.

Nevertheless, market worries continued to particularly hit other banking stocks, which led the fallers in London and Europe’s other key markets, after the Swiss authorities agreed for UBS to buy out stricken rival Credit Suisse.

The Prime Minister’s official spokesman said on Monday that Rishi Sunak has been regularly updated on the situation by the Treasury and the Bank of England, and has been in touch with the Swiss president.

“Obviously it is good that a resolution has seen secured,” the spokesman said.

“As the Bank of England has said, we believe the UK banking system remains safe and well capitalised.

“We have a strong regulatory system and we have taken a number of steps over the past 15 years, together with the Bank of England, to strengthen that system.”

During London trading, Standard Chartered and Barclays were among banks to witness a drop in share value, although losses were pared back somewhat throughout trading.

Markets in Asia were struggling earlier in the morning, with shares in Hong Kong falling by more than 3% as the banking sector took a battering.

It sets global markets up for what might be another grim week.

Having come off the worst week for European equity markets this year, volatility looks set to continue this week now that the fate of Credit Suisse appears to have finally been sealed

Heavy uncertainty has gripped the banking sector ever since the US’s 16th largest lender, Silicon Valley Bank, said it needed to raise money to stay afloat.

Since then shares in London’s FTSE 100 index have fallen by close to 9%, and several other banks in the US and Europe have struggled to keep their doors open.

The focus of investor anxiety appears to have now shifted on to high-risk bond holders in banks, after around 17 billion US dollars (£14 billion) of more risky Credit Suisse bonds were wiped out as part of its rescue takeover.

These bonds are a type of bank debt designed to take losses during a crisis, but concerns are mounting in the market over the Swiss regulator’s move to put shareholders ahead of bondholders, prompting regulators and central banks to issue statements to soothe fears.

The Bank of England joined the ECB Banking Supervision, the Single Resolution Board and the European Banking Authority in clarifying over UK creditor hierarchy in the event of insolvency.

They sought to reassure that common equity instruments, such as shares, are the first ones to absorb losses, after which AT1 bonds would be required to be written down.

But Michael Hewson, chief market analyst at CMC Markets, said the market volatility “serves to reinforce concerns about these types of writedowns and any spillover effects on the rest of the banking sector”.

The Credit Suisse deal was announced on Sunday evening, as UBS agreed to pay around £2.7 billion for its former rival.

The deal was brokered by the same Swiss regulators who had on Wednesday said they would lend up to £45 billion to Credit Suisse to keep it afloat.

The bank has had problems for years but was pushed over the edge last week because of market jitters sparked by the failure of Silicon Valley Bank in the US, which was a mid-sized lender.

On Sunday, Swiss president Alain Berset said an “uncontrolled” collapse of Credit Suisse could have sent ripples across the world which could cause “incalculable consequences” in the international financial system.

The lender is seen as a systemically important bank whose collapse could spark widespread market turmoil.

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