Global bank shares tumble after emergency rescue of Credit Suisse

Banking shares fell in London and across Europe on Monday after the emergency rescue of Credit Suisse by rival Swiss bank UBS failed to calm markets.

In the UK, Natwest, Barclays and Standard Chartered were all down more than 7%, while HSBC and Lloyds also fell about 5% in early trading, before recovering some ground.

European banking shares as measured by the Stoxx Europe 600 Banks Index was down nearly 3% on Monday morning. Credit Suisse shares plunged 60% while UBS was down 7%.

The fresh jitters were partly prompted by the terms of the rescue deal, which saw holders of $17bn (£14bn) of Credit Suisse’s bonds – Additional-Tier 1s (AT1) – wiped out, while equity investors were not as badly affected.

Neil Wilson, chief market analyst at Markets.com, commented: “Blatantly upending the hierarchy of debt will have ramifications and I think this is why we are seeing such a negative reaction in bank shares this morning.”

That decision, by the Swiss regulator, has spooked investors over concerns of a potential slump in the value of AT1 bonds at other institutions.

“The UBS acquisition of Credit Suisse over the weekend is not giving enough of a respite to market sentiment this morning, with stress now shifting to the AT1 bond market,” said Francesco Pesole, a foreign-exchange strategist at ING in London.

Eurozone regulators issued a statement on Monday morning in an attempt to reassure markets that the Credit Suisse deal hasn’t changed their position on the hierarchy of debt when a bank fails.

The Single Resolution Board (SRB), the European Banking Authority and ECB Banking Supervision said they welcome the “comprehensive set of actions taken yesterday by the Swiss authorities”.

They then spelled out to investors that they would force losses on equity holders, before investors holding AT1 bonds, despite the Credit Suisse deal inverting this order by wiping out its AT1, or CoCo, bonds.

In a thinly veiled criticism of the approach taken by their counterparts in Switzerland, the regulators said: “The resolution framework implementing in the European Union the reforms recommended by the Financial Stability Board after the great financial crisis has established, among others, the order according to which shareholders and creditors of a troubled bank should bear losses.

“In particular, common equity instruments are the first ones to absorb losses, and only after their full use would Additional Tier One [AT1] be required to be written down. This approach has been consistently applied in past cases and will continue to guide the actions of the SRB and ECB banking supervision in crisis interventions.

“Additional Tier 1 is and will remain an important component of the capital structure of European banks.”

The move appeared to ease concerns, with all major European indices turning positive after the statement was issued, having been negative when trading began on Monday morning.

Central banks took coordinated action on Sunday night to try to shore up confidence by agreeing measures to ensure banks in Canada, Britain, Japan, Switzerland and the eurozone would have the dollars needed to operate.

The US Federal Reserve, the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank announced they would boost liquidity through daily US dollar swaps.

The change is a modest expansion of an existing programme in which the Fed each week pays dollars to other central banks in exchange for local currency.

Earlier on Monday, shares in banking giants HSBC and Standard Chartered tumbled in the Asian stock market as details of UBS’s $3.2bn (£2.65bn) “emergency takeover” of Credit Suisse rattled global investors.

The two banking giants, which are headquartered in London but make a significant proportion of their income in Asia, fell by 7% and 5%, respectively in Hong Kong trading. Bank of East Asia fell 3.5%. Hong Kong’s Hang Seng Index was down 2.6%.

“Investors in Asia initially welcomed the action, but fresh worries are now coming to the surface about what could happen next,” said Susannah Streeter, head of money and markets at Hargreaves Lansdown.

“Focus is shifting to the implications of high-risk bond holders in banks, after holders of more risky Credit Suisse debt saw their investment wiped out. It is not yet known exactly where more pain will emerge in the banking sector, but investors fear the problems are not yet over.”

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