Bonds issued by major European banks fell after some Credit Suisse bondholders were wiped out in the deal, but UBS shares closed up 1.3 per cent, 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.
A deal on Sunday for a unit of New York Community Bancorp to buy deposits and loans from the failed Signature Bank also boosted sentiment in US banks. New York Community Bancorp shares surged 34 per cent.
The turmoil that gripped banks over the past week was triggered by the collapse of US mid-sized lenders Silicon Valley Bank and Signature Bank, quickly ensnaring Credit Suisse as investors fretted about other ticking bombs in the banking system.
The Federal Deposit Insurance Corporation has decided to break up Silicon Valley Bank and hold two separate auctions for its traditional deposits unit and its private bank after failing to find a buyer for the failed lender last week.
With worries around Credit Suisse easing, attention is now turning to the US Federal Reserve, whose relentless rate hikes to quash inflation were seen as a trigger for the turmoil. Traders have now increased their bets that the central bank will pause its hiking cycle on Wednesday to try to ensure financial stability.
Policymakers from Washington to Europe have stressed that the current turmoil is different than the global financial crisis 15 years ago as banks are better capitalised and funds more easily available.
Still, top central banks promised over the weekend to provide dollar liquidity to stabilise the financial system to prevent the banking jitters from snowballing into a bigger crisis.
In a global response not seen since the height of the pandemic, the US 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.
Investor focus in Europe shifted to the massive blow some Credit Suisse bondholders will take, prompting euro zone and UK banking supervisors to try to stop a rout in the market for convertible bank bonds.
The regulators said owners of this type of debt would only suffer losses after shareholders have been wiped out – unlike at Credit Suisse, whose main regulators are in Switzerland.
The eleventh-hour Swiss rescue 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 US$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 US$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. The deal will also make UBS Switzerland’s only global bank and the Swiss economy more dependent on a single lender.
S&P said its outlook on UBS was revised to negative over execution risk but affirmed its ratings.
Switzerland’s two biggest political parties sharply criticised the takeover, saying huge state support – which could add up to US$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.”