FTSE 100 rises and European banking shares are up after early jitters over what UBS takeover deal means for bondholdersStocks climbed on Monday in London and New York after central bankers and politicians sought to soothe jitters triggered by the emergency rescue of Credit Suisse during the weekend.
Central banks in the UK and eurozone issued statements aimed at reassuring investors that – unlike the controversial approach taken by the Swiss authorities in the Credit Suisse deal – their jurisdictions would follow a hierarchy in which equity holders would lose out before bond holders.
“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,” the Bank of England said in a statement issued on Monday.
Meanwhile, the prime minister’s official spokesperson also sought to offer reassurance as British banking stocks tumbled in early trading on Monday, telling reporters that the British banking system “remains safe and well capitalised”.
The FSTE 100 was up 1% or 75 points in afternoon trading, after starting the day firmly in the red. London-listed banking shares also mainly recovered to positive territory on Monday, after a heavy sell-off first thing. Standard Chartered and Barclays were still down, by 2.5% and 1.8% respectively.
European banking shares as measured by the Stoxx Europe 600 Banks Index were up 2% on Monday afternoon, after falling 3% during the morning. UBS rebounded to be up 2% after the deal to rescue its fellow Swiss bank and rival Credit Suisse over the weekend. Credit Suisse was down 56%.
Earlier 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 (AT1s) – wiped out, while equity investors were not as badly affected.
The global litigation firm Quinn Emanuel Urquhart & Sullivan announced it was in discussions with a number of holders of Credit Suisse’s AT1 capital instruments about possible legal action in response to the terms of the rescue deal. It said it was putting together a team of lawyers from Switzerland, the US and the UK.
Shares in the troubled San Francisco-based bank First Republic tumbled more than 18% even as most US banking stocks gained.
The losses followed a further downgrade to its debt by S&P Global. Moving the bank’s credit rating further into junk territory, S&P said the lender’s recent $30bn (£24bn) deposit infusion from 11 big banks may not solve its liquidity problems.
Eurozone regulators also issued a statement on Monday morning in an attempt to reassure markets that the Credit Suisse deal has not changed their position on the hierarchy of debt when a bank fails.
The Single Resolution Board (SRB), the European BankingAuthority and ECB Banking Supervision said they welcome the “comprehensive set of actions taken [on Sunday] 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.
The German chancellor, Olaf Scholz, added his voice to the chorus of leaders welcoming the action by Swiss authorities over the weekend, while also noting the stability of Germany’s banking system: “The situation is not comparable to 2008-09,” his spokesperson said. “The German banking system is well positioned,” they added.
The various moves appeared to ease concerns, with all big European indices turning positive after the statement was issued, having been negative when trading began on Monday morning.
While investors’ nerves appeared to steady somewhat, concerns over the what the UBS-Credit Suisse tie-up would mean for jobs began to build.
London’s Canary Wharf is home to about 5,500 Credit Suisse employees, ranging from investment bankers and asset managers to technology and risk and compliance teams.
UBS has said it will run down the investment bank division of Credit Suisse, and UBS’s UK former chief executive, Mark Yallop, told BBC Radio 4’s Today programme that he thought job losses were “inevitable” in the merger.
“I would imagine those would be concentrated in the risky investment banking business at Credit Suisse which is partly the cause of the problems the firm is experiencing,” he said.
It is unclear what the merger will mean for UBS’s employees, too. It has UK offices in London, Birmingham, Manchester, Leeds, Newcastle upon Tyne and Edinburgh.
The concerns about future job prospects will not stop staff receiving bonuses at Credit Suisse, however.
Fears over job cuts come after central banks took coordinated action on Sunday night to try to shore up confidence by agreeing measures to ensure banks in Canada, the UK, 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 increase 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 the banks HSBC and Standard Chartered tumbled in the Asian stock market as details of UBS’s $3.2bn “emergency takeover” of Credit Suisse rattled global investors.