UBS shares suffer largest fall since 2008 after rescue deal – live

The banking sector was dealt another blow this morning when stocks in several major European lenders plunged in early morning trading following UBS’s £2.7bn rescue deal to save struggling lender Credit Suisse.

My colleague Matt Mathers has this guide to everything we know so far on the banking crisis that began in the US and continues to have global consequences:

In case you missed it- Chris Blackhurst writes about bank rescues and bailouts:

Let us start with the good news. It is that this time there is no messing about, no waiting – the authorities and rival banks have got together and moved impressively quickly.

Silicon Valley Bank or SVB has been saved in the UK by HSBC; in the US, the Federal Reserve reacted swiftly to guarantee all deposits. Credit Suisse has received a Swiss government life-saving injection; First Republic is saved, for now, by a group led by Bank of America, Goldman Sachs and JP Morgan depositing $30bn.

Compared to 2008, everyone involved is acting quicker and more decisively. There’s no room for delay – this is an emergency, we must stop this bank from going under and wiping out its customers. And we must prevent the toppling of other banks.

The Bank of England has said holders of the higher-risk bonds that were wiped out in the Credit Suisse emergency takeover by rival UBS “should expect to be exposed to losses”.

Swiss regulator Finma demanded on Sunday that around 17 billion US dollars (£14 billion) of Credit Suisse‘s so-called additional tier one (AT1) bonds must be written down to zero under the deal.

These bonds are a type of bank debt designed to take losses during a crisis, but has raised concerns in the market over Finma’s move to put shareholders ahead of bondholders.

The Bank of England said: “The UK’s bank resolution framework has a clear statutory order in which shareholders and creditors would bear losses in a resolution or insolvency scenario. This was the approach used for the recent resolution of SVB UK.”

It added: “Holders of such instruments should expect to be exposed to losses in resolution or insolvency in the order of their positions in this hierarchy.”

It reiterated that the UK banking system is “well capitalised and funded, and remains safe and sound” amid ongoing turmoil in financial markets on concerns over a mounting crisis in the bank sector.

Wall Street’s main indexes were set for a subdued open in volatile trading on Monday as investors weighed a state-backed takeover of Credit Suisse and the odds of the Federal Reserve keeping interest rates unchanged this week.

Traders have raised bets of the Fed likely hitting a pause on rate hikes on Wednesday to ensure financial stability as bank sector troubles triggered by the collapse of Silicon Valley Bank and Signature Bank threaten to snowball.

Over the weekend, UBS agreed to buy rival Credit Suisse for $3.23 billion, in a shotgun merger engineered by Swiss authorities to avoid more market-shaking turmoil in global banking.

U.S.-listed shares of Credit Suisse plummeted 57.9% in premarket and were set to open at a fresh record low, while those of UBS lost 3.5%, as focus shifted to the hit to some Credit Suisse bondholders from the acquisition.

“Market has been digesting the shotgun wedding between UBS and Credit Suisse. Systemic risks are a little bit more minimized (and) everyone is just looking forward to what the Fed is going to do,” said Matt Orton, chief market strategist at Raymond James Investment Management.

“The Fed really is between a rock and a hard place because it’s got to stay committed to monetary policy. It’s worked hard to regain its credibility and this banking issue really throws a wrench into it.”

Traders’ bets are now tilted towards a no-hike scenario, with 43% expecting the Fed to raise rates by 25 basis points.

Investors also await economic data including existing home sales, weekly jobless claims and durable goods this week to gauge the strength of the U.S. economy.

U.S. stock futures reversed course to rise marginally in choppy trading. At 8:24 a.m. ET, Dow e-minis were up 9 points, or 0.03%, S&P 500 e-minis were up 0.75 points, or 0.02%, and Nasdaq 100 e-minis were up 1.75 points, or 0.01%.

Top central banks also moved on Sunday to bolster the flow of cash around the world, with the Fed offering daily currency swaps to ensure banks in Canada, Britain, Japan, Switzerland and the eurozone would have the dollars needed to operate.

Big U.S. banks such as JPMorgan Chase & Co, Citigroup and Morgan Stanley seesawed between losses and gains.

Regional bank First Republic Bank slid 19.2%, following a downgrade by S&P Global and a report of more fundraising that fanned worries about the bank’s liquidity despite a $30-billion rescue last week.

PacWest Bancorp was among the rare bright spots, jumping 19.7%, after the bank said deposit outflows had stabilized and its available cash exceeded total uninsured deposits.

The S&P Banking index and the KBW Regional Banking index on Friday logged their largest two-week drop since March 2020.

Among other stocks, Bed Bath & Beyond dropped 14.2% after seeking shareholder approval for a reverse stock split.

Switzerland’s two biggest political parties sharply criticized UBS’s takeover of Credit Suisse saying multi-billion state support for the deal created enormous risks for the country.

Swiss authorities announced on Sunday that UBS had agreed to buy rival Swiss bank Credit Suisse in a shotgun merger aimed at containing a crisis of confidence that was spreading through global banking.

Parties across the political spectrum raised concerns about the vast amounts of amounts of money provided through the liquidity injection from the central bank as well as government aid.

Credit Suisse and UBS could benefit from around 260 billion Swiss francs ($280 billion) in state and central bank support, a third of the country’s gross domestic product. The aid comes in the form of 250 billion in liquidity which will be repaid, while the government will absorb up to 9 billion in losses from the deal.

Roger Nordmann, leader of the Social Democrats (SP) in the Swiss lower house of parliament, warned that the support package amounted to an “enormous risk”.

“The new UBS is also another massive risk, it’s going to have more than 1,500 billion francs in assets, and it’s simply too big for Switzerland,” he told Reuters on Monday.

The Social Democrats are the second biggest party in the Swiss parliament and have two ministers in the country’s ruling cabinet.

The criticism ups pressure on the ruling cabinet, which rules by consensus, although it is unlikely to derail the deal.

Nordmann said he was also concerned about job losses, and blamed Credit Suisse‘s leadership for the bank’s failure.

“What has happened is terrible for the credibility of Switzerland,” he said. “It’s a warning shot for Switzerland about having banks which are just too big. I’m very concerned about the new UBS.”

Meanwhile the right-wing Swiss People’s Party (SVP) said it was worried about the billions now being deployed to make up for what it called the mistakes of Credit Suisse leadership and the “rip offs” by management.

In a memo seen by Reuters that was sent to staff on Sunday after the deal announcement, Credit Suisse reassured staff that their bonuses would be paid in full.

“Everything must be done to ensure … the Swiss people are not harmed in the rescue,” said the party in a statement.

The party, the biggest in the Swiss parliament and which also has two members of the seven-strong cabinet, demanded clear conditions for the takeover.

“Otherwise UBS will become the next dangerous restructuring case,” the SVP said.

Banking shares in London have been hammered by the fears but Bank of England governor Andrew Bailey was quick on Sunday night to insist the financial system in the UK is “well capitalised and funded, and remains safe and sound”.

However, on Monday morning, FTSE 100 was down 0.7 per cent as markets opened in London.

Commenting on why investors may be apprehensive, Innes McFee, chief global economist at Oxford Economics, said: “UBS’ takeover of Credit Suisse, coming off the back of the failure of regional lenders in the US, has kept funding concerns elevated in markets. In particular, the decision to write down AT1 Bonds will make investors in that type of bank security think twice.”

Downing Street has said the UK banking system remains “safe and well-capitalised” following the takeover of the troubled Credit Suisse bank.

The prime minister’s official spokesman said 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.”

Rishi Sunak has spoken to the Swiss president about the Credit Suisse developments, according to the prime minister’s spokesperson.

Economists and investors so far expect the Fed to proceed with another quarter point interest rate increase at its March 21-22 meeting, but only because inflation poses such a persistent risk policymakers won’t want to divert from efforts to control it.

The financial system, meanwhile, has been thrown extra support under a new Fed lending program for banks, while its traditional lender-of-last-resort cash window was tapped for a record $150 billion.

Fed officials gather this week having agreed bank stress poses a “systemic risk” to the economy, and “in any other hiking cycle this…would end the tightening process and perhaps send it into reverse,” said Ed Al-Hussainy, senior rates analyst at Columbia Threadneedle Investments. “The difference today is the Fed’s focus on inflation.”

In a recent Reuters poll 76 of 82 economists said they expect the Fed to approve a quarter point rate increase at this week’s meeting, lifting the target federal funds rate to a range between 4.75% and 5%. A similarly strong majority expect a further increase at a future Fed session.

The Fed’s policy statement will be released Wednesday at 2 p.m. (1800 GMT) along with closely watched projections from officials for the policy rate at year’s end, perhaps the best clue to how recent financial stress has reshaped the Fed’s outlook.

As of December officials expected the policy rate would rise to around 5.1% by year’s end.