The forced takeover of Credit Suisse over the weekend and a coordinated effort to ease the flow of dollars around the globe are unable to stem the bleeding on the stock markets.
In response to measures to alleviate the sector’s confidence crisis, bank stocks are mounting a comeback following sharp early declines across Asia and Europe.
Following the forced takeover of Credit Suisse by Swiss rival UBS, it was announced overnight that six major central banks. Including the Bank of England, would take coordinated action to bolster dollar flows.
The so-called swap line arrangement between the US Federal Reserve, the Bank of Japan, the European Central Bank, the Bank of Canada, and the Swiss National Bank (SNB) sought to “enhance the provision of liquidity” and “facilitate the smooth functioning of US dollar funding markets.
It was hoped that the seven-day-a-week facility, which is scheduled to operate until at least the end of April, would be sufficient to restore market confidence in the health of other banks, especially US regional lenders.
In the aftermath of the failure of Silicon Valley Bank earlier this month, the share prices of many companies have plummeted due to concerns that the aggressive pace of interest rate hikes to combat inflation has damaged balance sheets.
Nonetheless, Asian stock markets began the week in the red, with Hang Seng in Hong Kong declining 2.7%.
In Europe, the FTSE 100, which has lost nearly 7% of its value so far this month, dropped as much as 1.5% in early trading, in line with other main European indices, but later stabilized and even rose.
Early in the day, financial stocks including Prudential, Barclays, and Standard Chartered were all down approximately 5%. However, these losses had been cut in half by midday.
The SNB’s hasty purchase of Credit Suisse, planned before the market opened, was expected to ease concerns.
However, the reality that numerous bondholders were wiped out at the instruction of a Swiss regulator initially heightened tensions.
After the ruling, AT1 bond holders were rumored to be selling their holdings to other banks early in the morning.
For its part, the Bank of England reiterated its own “creditor hierarchy” to assuage AT1 bondholders’ regulatory concerns. Insisting that creditors take precedence over shareholders.
Market experts said bank stocks were relieved after the Credit Suisse rescue.
Credit Suisse, 167 years old, nearly collapsed last week despite a $54bn (£44bn) credit line from Switzerland’s central bank.
The credit line was agreed upon to reassure markets and depositors, but it failed to stem the influx of customer withdrawals, prompting the Swiss government to request that rival UBS contemplate a takeover.
This acquisition was disclosed on Sunday evening – UBS will pay 3 billion Swiss francs (£2.6 billion) to acquire Credit Suisse, it has agreed to assume up to 5 billion Swiss francs (£4.4 billion) in losses, and both banks will have access to 100 billion Swiss francs (£88.5 billion) in liquidity assistance.
The transaction is anticipated to close by the end of the year. It was viewed as a potential hazard to employment in the United Kingdom. As Credit Suisse employs approximately 5,000 people in the City.
Monday morning, UBS shares were down more than 14%, but later turned positive.
Colm Kelleher, chairman of UBS Group, had previously stated that the acquisition presented “enormous opportunities.”
He also stated that the long-term objective of his bank would be to reduce the scale of Credit Suisse’s investment banking division and align it with UBS’s “conservative risk culture.”
Axel Lehmann, Credit Suisse’s chairman, called the day “historic, tragic, and extremely challenging” for his bank and the market.
“The best possible result”
Mr. Lehmann stated, “In light of recent extraordinary and unheard-of circumstances, the announced merger represents the best possible outcome.”
“This has been a very difficult time for Credit Suisse, and while the team has worked tirelessly to address many significant legacy issues and implement its new strategy, we are compelled to reach a solution that provides a lasting outcome today.”
“Exceptional circumstance”‘
In a statement, the Swiss central bank and other officials described the agreement as “a solution…to ensure financial stability and safeguard the Swiss economy in this extraordinary situation.”
It is also anticipated that UBS’s acquisition of its former rival will prevent a repeat of the 2008 financial crisis.
Central institutions assert that systems are robust
The news was applauded by central banks in the United States, Europe, and the United Kingdom.
All three insisted that their respective banking systems are robust and resilient.
The Bank of England stated, “Throughout the preparations for today’s announcements. We have worked closely with international counterparts and will continue to support their implementation.”
“The British banking system is adequately capitalized and funded and remains secure.”
Credit Suisse is one of the world’s largest wealth managers and one of thirty banks classified as systemically significant. So the deal’s repercussions reverberated throughout the global financial markets.
In response to the crisis, widespread speculation grew that the Federal Reserve. Unlike the European Central Bank last week, would not implement another rate hike on Wednesday.
