Relief over Credit Suisse deal crumbles as major banks left scrambling

The European Central Bank vowed to support eurozone banks with loans if needed, adding the Swiss rescue of Credit Suisse was 'instrumental' in restoring calm. Picture: Yui Mok/PA Wire

Banking stocks tumbled on Monday as initial relief over a historic state-backed rescue of troubled lender Credit Suisse by Swiss rival UBS Group gave way to new worries about the risks of high-yield debt issued by big banks.

In a package orchestrated by Swiss regulators on Sunday, UBS Group AG (UBSG.S) will pay 3bn Swiss francs (€3.03bn) for 167-year-old Credit Suisse Group AG (CSGN.S) and assume up to €5.7bn in losses.

Major central banks, faced with the risk of a fast-moving loss of confidence in the financial system, also scrambled on Sunday to bolster the flow of cash around the world with a series of coordinated currency swaps to ensure banks have the dollars needed to operate.

While those developments appeared to shore up investor confidence in early Asian trade, the rally quickly evaporated as focus shifted to the massive hit some Credit Suisse bondholders would take under the UBS acquisition.

Under the deal, the Swiss regulator decided Credit Suisse additional tier-1 bonds — or AT1 bonds — with a notional value of €20bn will be valued at zero, angering some of the holders of the debt who thought they would be better protected than shareholders in the takeover deal announced on Sunday.

A view of the Credit Suisse UK offices in Canary Wharf, London

Worries about what that might mean for holders of AT1 bonds issued by other banks added to persistent anxiety about a range of other risks, including contagion, the fragile state of US regional banks and moral hazard.

Standard Chartered Plc and HSBC shares each fell more than 6% in Hong Kong on Monday to more than two-month lows, with HSBC facing the possibility of posting its largest one-day drop in six months. 

Chief marketing strategist of Jones Trading, Mike O'Rourke, said: 

"It should be clear that after more than a week into the banking panic, and two interventions organised by the authorities, this problem is not going away. Quite the contrary, it has gone global.

"The reports that UBS is acquiring Credit Suisse will likely magnify Credit Suisse's problems by moving them to UBS."

The shotgun Swiss banking marriage is backed by a massive government guarantee, helping prevent what would have been one of the largest banking collapses since the fall of Lehman Brothers in 2008.

In a global response not seen since the height of the pandemic, the Fed said it had joined central banks in Canada, England, Japan, the EU and Switzerland in a co-ordinated action to enhance market liquidity. 

The European Central Bank vowed to support eurozone banks with loans if needed, adding the Swiss rescue of Credit Suisse was "instrumental" in restoring calm.