European and Asian shares fell on Monday after UBS’s takeover of the failing Credit Suisse on Sunday stirred nerves around the health of the broader global banking system.
After heavy declines in Asia, including a 7.1 per cent fall in HSBC in Hong Kong, the European Stoxx 600 banking index fell more than 3 per cent. Shares in Credit Suisse dropped 63 per cent and UBS 15.6 per cent. Société Générale fell 7.9 per cent and Commerzbank slipped 8.6 per cent.
“In less than a fortnight three midsized US banks have failed and Credit Suisse has been fast-tracked into a takeover by UBS,” said Ian Stewart, Deloitte’s chief economist in the UK. “These events represent the most challenging moment for the banking system since the early days of the financial crisis in 2008. As has happened so often before, a combination of rising interest rates and slowing growth are testing the financial system.”
Goldman Sachs said it expected the outbreak of stress in the banking sector to constrain central banks’ plans to keep raising interest rates in their long-running battle with inflation. The investment bank trimmed its eurozone economic growth forecast by 0.3 percentage points and said it now expected the European Central Bank to raise rates by a quarter of a point in May. It previously anticipated a half point. It also no longer expected the Bank of England to raise rates in May.
One element of the rapid-fire takeover of Credit Suisse that is fuelling jitters among debt investors is the deal’s wipeout of $17bn of the bank’s bonds.
Swiss regulator Finma demanded on Sunday that SFr16bn ($17bn) of Credit Suisse’s additional tier one (AT1) bonds, a type of bank debt designed to take losses during a crisis, be written down to zero as part of the rescue deal with UBS. Reuters reported that prices on other similar bank bonds in Europe fell by 10 to 12 cents in early trading on Monday.
“It is a wake-up call to investors that AT1 bonds carry real risks of being written off in extreme scenarios, which is also the purpose of having such bonds,” said Gary Ng, senior economist at Natixis in Hong Kong. “The move will likely trigger some sell-offs and risk rebalancing from bond investors and wealth management product holders.”
Finma’s decision, taken as part of a frantic weekend of negotiations to broker a deal for Credit Suisse and prevent a spreading crisis, meant the bank’s AT1 debtholders lost more than its shareholders and cast doubt on the hierarchy of claims in the event of a banking failure. It was the biggest writedown so far of AT1 debt.
“I think the black form scenario where Credit Suisse collapses has been ruled out, but markets are looking at implications for bondholders across other markets,” said Francesco Pesole, an FX Strategist at ING. “What we’re seeing from the central bank and M&A side is steps to support the system and restore calm but it’s a gradual process and markets still have fears.”
Hundreds of billions of dollars worth of AT1 bonds were issued after the 2008 financial crisis as part of an international regulatory move to transfer the risk of bank failure to investors in bonds exposed to writedowns in a crisis.
They have so far rarely incurred losses, though in 2017, they were also written down as part of the failure of Banco Popular in Spain.
AT1s are usually owned by professional bond investors and hedge funds but are also popular among retail and wealth management investors in Asia.
An Asia fixed-income sales executive at a global investment bank said some investors were pulling out of AT1 debt altogether. “What we are seeing in Asia today is investors looking at what happened over the weekend and working out whether they should treat AT1 debt as the same type of risk as before, and so some are just already saying they want to get out,” the executive said.
“This is an assessment that a lot of people are doing today — institutions, banks and private bank clients that all hold this.”
Broader markets were also down. Europe’s region-wide Stoxx 600 fell 0.6 per cent, while Germany’s Dax index lost 0.5 per cent, France’s Cac 40 lost 0.3 per cent and London’s FTSE 100 dropped 0.8 per cent.
Asian stocks mostly opened lower. Japan’s Topix shed 1.5 per cent, while South Korea’s Kospi fell 0.7 per cent. Hong Kong’s Hang Seng index declined 3.4 per cent, and China’s CSI 300 lost 0.5 per cent.
US futures were down on Monday, with contracts for the S&P 500 and Nasdaq 100 down 0.3 per cent and 0.2 per cent, respectively.
The yield on the 10-year US Treasury note shed 0.09 percentage points to 3.3 per cent. The yield on the two-year note fell 0.18 percentage points to 3.66 per cent.
The yield on 10-year German Bunds fell 0.18 percentage points to 1.95 per cent, and the yield on the two-year note fell 0.29 percentage points to 2.14 per cent.
Last week efforts to shore up struggling US bank First Republic also failed to convince investors. Its shares closed down 33 per cent after 11 of the largest US banks, spearheaded by JPMorgan Chase, said they would deposit $30bn with the California-based lender.
This week focus will be on the Federal Reserve’s meeting on Tuesday and Wednesday, in which its latest interest rate decision will be decided. Investors are now pricing in a 67 per cent chance of no change, and a 33 per cent chance of a 0.25 percentage point rise.
“Much will depend on whether a modicum of stability returns to financial markets, especially for regional banks,” said analysts at ING. “In an ideal world, the Fed would separate monetary policy (inflation requiring more hikes) and financial stability (liquidity provision to banks). In practice, a hike could aggravate financial stability concerns.”
In currency markets, the dollar index, which measures the greenback against a basket of six rival currencies, was flat. The euro fell 0.2 per cent and sterling was flat.
Brent crude, the international benchmark, and WTI, the US equivalent, fell 2.5 and 2.8 per cent respectively, their lowest price since December 2021.
Additional reporting by Primrose Riordan in Hong Kong