Introduction: Central banks announce dollar liquidity measures to fight banking crisis
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
The world’s leading central banks are taking action to offset growing strains in the global financial system, as UBS agrees to buy Credit Suisse in an emergency, cut-price deal that may stem the panic in the banking sector.
But UBS’s move hasn’t cheered the markets, with bank shares under pressure again today as $17bn of risky Credit Suisse bonds are wiped out in the deal.
Late last night, the world’s top central banks announced their first coordinated action since the market turmoil began this month.
The 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 in their standing US dollar swap arrangements.
The central banks said the action was designed to enhance the provision of liquidity through the standing US dollar liquidity swap.
It means there should be improved global access to dollar liquidity, to ease strains in global funding markets.
As central banks try to head off the financial crisis given problems with Silicon Valley Bank, Credit Suisse etc., swap lines between central banks are back to increase the provision of US dollar liquidity in the €zone and elsewhere. pic.twitter.com/Wsi6675Smm
— Philipp Heimberger (@heimbergecon) March 20, 2023
The move came at the start of a new week likely to be dominated by the banking crisis.
The deal hammered out yesterday sees UBS pay almost $3.25bn (£2.65bn) for Credit Suisse, or 0.76 Swiss francs per share in its own stock. That’s far below Credit Suisse’s closing price of 1.86 Swiss francs on Friday, and was agreed after a frenetic weekend of negotiations.
UBS chairman Colm Kelleher said Credit Suisse was a “very fine asset we are determined to keep”, adding:
“This acquisition is attractive for UBS shareholders but, let us be clear, as far as Credit Suisse is concerned, this is an emergency rescue.”
Swiss regulators pushed for a deal, before the financial markets reopened today, as the market turmoil enters its third week.
Credit Suisse was a systemically important bank, as the Swiss National Bank president, Thomas Jordan, explained:
“It was indispensable that we acted quickly and find a solution as quickly as possible”
While shareholders will see their stakes priced down, some bond holders are also taking a loss. Some $17bn of risky bonds issued by Credit Suisse are being wiped out as part of the deal. Those contingent convertible bonds, or CoCos, also known as Additional Tier 1 (AT1) bonds, are designed to take losses when institutions hit trouble.
Swiss finance minister Karin Keller-Sutter insisted the UBS deal was the best solution.
She told a press conference last night that:
“This is no bailout. This is a commercial solution because UBS is taking over Credit Suisse.
The bankruptcy of Credit Suisse would have had a huge collateral damage – on the Swiss financial market also internationally.”
The Bank of England insisted last night that the financial system in the UK remains “safe and sound”.
The agenda
-
10am GMT: Eurozone trade balance for January
-
11am GMT: German Bundesbank’s monthly report
-
2pm GMT: ECB president Christine Lagarde testifies to the European Parliament
Key events
There is unease in Switzerland over the impact of the UBS-Credit Suisse deal on its banking sector, and the prospect of job cuts.
The Swiss Bank Employees Association, in a statement to Reuters, has demanded that UBS keep job cuts to an “absolute minimum”.
They warned:
“The jobs of very many employees are at stake,”
The association added that it was in touch with management.
The head of the Bank of France has insisted that French banks are ‘solid’, following UBS’s emergency deal to buy Credit Suisse.
Francois Villeroy de Galhau told Le Monde newspaper that he welcomed Switzerland’s move, and that French banks were stable and profitable.
Villeroy said:
“Regarding Credit Suisse, this is a bank which for several years now had problems regarding its business model and profitability, as well as insufficient internal controls.
The Swiss authorities were well mobilised this weekend to tie it up to UBS, which is a welcome solution.
“The French banking industry is concentrated around six big banks which all have solid and profitable business models, strong control on their risks, and a high degree of regulatory compliance.
Villeroy, who is also a member of the European Central Bank’s governing council, added:
“To once again state the obvious, French banks are solid.”
Oil hit by global growth fears
The oil price has hit its lowest level since December 2021, as traders fear that the banking crisis will pull economies into recession.
Brent crude, the international benchmark, has dropped by 2.5% this morning to $71.13 per barrel, extending its recent slide.
US crude oil prices are also weakening, with a barrel of West Texas Intermediate down 2.8% at $64.85 per barrel.
Ipek Ozkardeskaya, senior analyst at Swissquote Bank, says:
Crude oil kicked off the week under pressure, below the $70pb level as the bank stress weigh on global growth prospects and sent the price of a barrel below this psychological level.
Bank shares slide amid nervousness over $17bn Credit Suisse bond writedown
Shares in major banks are sliding this morning, as initial relief over the emergency rescue of Credit Suisse fades.
Investors are concerned about the massive hit some Credit Suisse bondholders would take under the UBS acquisition, given that $17bn worth of riskier AT1 bonds are being wiped out under the deal (see opening post).
That decision, by the Swiss regulator, has angered some debt holders thought they would be better protected than shareholders in the takeover deal announced on Sunday.
This has created worries about what that might mean for holders of AT1 bonds issued by other banks , at a time of high nervousness about the financial system.
Shares in Standard Chartered have fallen 5% in Hong Kong trading, while HSBC has tumbled 7%, pulling the Hang Seng index down by other 3%.
European markets are set for fresh losses, with the FTSE 100 index being called down over 1% when trading begins at 8am.
Having come off the worst week for European equity markets this year, volatility looks set to continue this week, warns Michael Hewson of CMC Markets.
Hewson explains:
With Credit Suisse shareholders and some bondholders taking a huge hit, banks in Asia have taken a hit on similar concern about their AT1 bond holding values, while the weekend deal still presents the Swiss National Bank and Swiss Government with untold headaches, with the size of the newly merged bank set to dwarf the size of the Swiss economy. The phrase too big to fail really does spring to mind here, and this morning’s weakness in Asia markets serves to reinforce concerns about these types of writedowns and any spillover effects on the rest of the banking sector.
As for Credit Suisse, it is in no position to dictate the price of any rescue package given the problems it was facing, and if its shareholders are unhappy with the price they’ve got, they should have stumped up the extra cash themselves!
Central banks welcome UBS-Credit Suisse deal
Financial market regulators around the world have welcomed the news that UBS will buy Credit Suisse for $3.25bn.
The Bank of England said last night it had been ‘engaging closely with international counterparts while the UBS-Credit Suisse deal was being agreed.
We welcome the comprehensive set of actions set out by the Swiss authorities today in order to support financial stability. We have been engaging closely with international counterparts throughout the preparations for today’s announcements and will continue to support their implementation.
The UK banking system is well capitalised and funded, and remains safe and sound.
Christine Lagarde, President of the European Central Bank, said the ECB has the tools it needs to provide more support, if needed.
“I welcome the swift action and the decisions taken by the Swiss authorities. They are instrumental for restoring orderly market conditions and ensuring financial stability.
The euro area banking sector is resilient, with strong capital and liquidity positions. In any case, our policy toolkit is fully equipped to provide liquidity support to the euro area financial system if needed and to preserve the smooth transmission of monetary policy.”
Federal Reserve Chair Jerome Powell and Treasury Secretary Janet Yellen insisted America’s banking sector was strong;
“We welcome the announcements by the Swiss authorities today to support financial stability.
“The capital and liquidity positions of the U.S. banking system are strong, and the U.S. financial system is resilient. We have been in close contact with our international counterparts to support their implementation.”
Introduction: Central banks announce dollar liquidity measures to fight banking crisis
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
The world’s leading central banks are taking action to offset growing strains in the global financial system, as UBS agrees to buy Credit Suisse in an emergency, cut-price deal that may stem the panic in the banking sector.
But UBS’s move hasn’t cheered the markets, with bank shares under pressure again today as $17bn of risky Credit Suisse bonds are wiped out in the deal.
Late last night, the world’s top central banks announced their first coordinated action since the market turmoil began this month.
The 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 in their standing US dollar swap arrangements.
The central banks said the action was designed to enhance the provision of liquidity through the standing US dollar liquidity swap.
It means there should be improved global access to dollar liquidity, to ease strains in global funding markets.
As central banks try to head off the financial crisis given problems with Silicon Valley Bank, Credit Suisse etc., swap lines between central banks are back to increase the provision of US dollar liquidity in the €zone and elsewhere. pic.twitter.com/Wsi6675Smm
— Philipp Heimberger (@heimbergecon) March 20, 2023
The move came at the start of a new week likely to be dominated by the banking crisis.
The deal hammered out yesterday sees UBS pay almost $3.25bn (£2.65bn) for Credit Suisse, or 0.76 Swiss francs per share in its own stock. That’s far below Credit Suisse’s closing price of 1.86 Swiss francs on Friday, and was agreed after a frenetic weekend of negotiations.
UBS chairman Colm Kelleher said Credit Suisse was a “very fine asset we are determined to keep”, adding:
“This acquisition is attractive for UBS shareholders but, let us be clear, as far as Credit Suisse is concerned, this is an emergency rescue.”
Swiss regulators pushed for a deal, before the financial markets reopened today, as the market turmoil enters its third week.
Credit Suisse was a systemically important bank, as the Swiss National Bank president, Thomas Jordan, explained:
“It was indispensable that we acted quickly and find a solution as quickly as possible”
While shareholders will see their stakes priced down, some bond holders are also taking a loss. Some $17bn of risky bonds issued by Credit Suisse are being wiped out as part of the deal. Those contingent convertible bonds, or CoCos, also known as Additional Tier 1 (AT1) bonds, are designed to take losses when institutions hit trouble.
Swiss finance minister Karin Keller-Sutter insisted the UBS deal was the best solution.
She told a press conference last night that:
“This is no bailout. This is a commercial solution because UBS is taking over Credit Suisse.
The bankruptcy of Credit Suisse would have had a huge collateral damage – on the Swiss financial market also internationally.”
The Bank of England insisted last night that the financial system in the UK remains “safe and sound”.
The agenda
-
10am GMT: Eurozone trade balance for January
-
11am GMT: German Bundesbank’s monthly report
-
2pm GMT: ECB president Christine Lagarde testifies to the European Parliament
