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The Guardian - UK
The Guardian - UK
Business
Graeme Wearden

Investors consider legal action over Credit Suisse deal; Downing Street says UK banking system is safe – as it happened

Credit Suisse UBS United States Christine Lagarde Michael Hewson The Bank of England Bonds ECB the European Central Bank the Swiss National Bank
Credit Suisse logo displayed on mobile with UBS seen in the background.
Credit Suisse logo displayed on mobile with UBS seen in the background. Photograph: Jonathan Raa/NurPhoto/REX/Shutterstock

Closing post

Time to wrap up….

Here’s our news story on the latest developments with Credit Suisse:

And the latest on the troubled US banking sector, where First Republic’s shares are being hit again today, despite a rescue package being agreed by major banks last week:

Here’s Nils Pratley on the implications for bond holders of the Credit Suisse deal:

We also have economist and experienced fund manager, Toby Nangle, on how rising interest rates have been causing mayhem in the bond markets:

Here’s a handy explained on the AT1 bonds which are being surpriingly wiped out before shareholder equity:

Updated

Although markets shook off their earlier losses, it’s too early to say that the crisis is over, warns Neil Wilson of Markets.com.

He says:

We saw markets try to rally last week whenever a lifeline was thrown to CS – today might be different but it is too early to say for sure that things have meaningfully stabilised. It stops once investors stop wondering who’s next.

And here’s Danni Hewson, AJ Bell head of financial analysis, on the markets::

“The shotgun wedding between UBS and Credit Suisse does seem to have diffused some of the tension from the global banking sector today, but investor confidence has been badly shaken and despite liberal applications of monetary putty there are still a few visible cracks.

“Shares in embattled First Republic are down once again today after another credit rating hit despite the billions syphoned in by several of its larger counterparts. Trust is crucial when you’re asking depositors to stick with you and many of those depositors still feel safer switching to bigger banks which have been subject to greater regulatory scrutiny, though the outflow of cash has been slowing following last week’s interventions.

Updated

Shares in UBS have ended the day 1.2% higher, as traders react to its cut-price takeover of Credit Suisse.

Credit Suisse shares suffered a very hefty loss, tumbling by 55% to 0.823 of a Swiss franc. That’s slightly above the headline value of UBS’s all-share offer, with the rise in UBS’s shares today providing a little support.

FTSE 100 closes higher

After a choppy day, Britain’s blue chip share index has closed almost 1% higher than it began the session.

The FTSE 100 has closed 68 points higher at 7,404 points, quite a recovery after being down almost 2% at one stage this morning.

Mining stocks led the rally, with Anglo American gaining 4.9% and silver producer Fresnillo 4.8% higher.

Bank shares lagged, though, with Standard Chartered off 3%, Barclays losing 2.3% and Lloyds Banking Group dipping by 0.3%.

The Swiss authorities have opened a can of worms by allowing Credit Suisse shareholders to receive 3bn Swiss francs through UBS’s takeover while wiping out the AT1 bond holders, my colleague Nils Pratley writes.

Other regulators recognised this immediately, Nils points out (as we’ve been covering today):

The European Central Bank and the Bank of England, while welcoming the “comprehensive” Swiss action, separately stated that they haven’t gone soft on whacking shareholders when appropriate.

“Common equity instruments are the first ones to absorb losses, and only after their full use would additional tier 1 be required to be written down,” said the ECB.

Nobody should have fooled themselves that ATI bonds are risk-free, of course. These so-called “contingent capital” notes are designed to take losses in a crisis and ease a bank’s debt burden. If shareholders had also got zero, there could be no grounds for complaint, legal or moral. The problem is solely the ripping-up of the hierarchy of financial pain.

The write-down to zero of Credit Suisse’s CoCo bonds will produce the largest loss in the $275 billion AT1 market to date, dwarfing the €1.35bn ($1.44bn) bondholders of Spain’s Banco Popular lost in 2017.

The prices of AT1 bonds issued by other banks, including Deutsche Bank, HSBC, UBS and BNP Paribas have all come under pressure today.

Reuters says:

They recovered marginally but were still down 6-11 points on the day, sending yields sharply higher, data from Tradeweb showed.

Investors and bond-holders consider legal action over Credit Suisse takeover

Investors who hold bonds or shares in Credit Suisse are considering taking industrial action over the bank’s rescue by UBS.

Global litigation firm Quinn Emanuel Urquhart & Sullivan says it is already in discussion with some investors who hold Credit Suisse’s AT1 bonds, the risky securities which are being surprisingly wiped out under the UBS deal.

Quinn Emanuel Urquhart & Sullivan says it has put together a multi-jurisdictional team of lawyers from Switzerland, the US and the UK, since the news broke last night, and are talking to some AT1 bond-holders already.

This team will examine Switzerland’s decision to make Credit Suisse’s AT1, or CoCo, debt worthless, while shareholders will receive $3.2bn from UBS, which is a 60% haircut on the value of their equity.

The firm says:

That team are already in discussions with a number of holders of Credit Suisse’s AT1 capital instruments, representing a significant percentage of the total notional value of AT1 instruments issued by Credit Suisse, about the possible legal actions that may be available to them in light of the announcement of the merger between UBS and Credit Suisse.

Quinn Emanuel Urquhart & Sullivan expects to hold a call with bondholders on Wednesday, where they will talk through the potential avenues of redress which bondholders should be considering.

Some Swiss investors say they are considering legal action over emergency measures that meant shareholders did not get a vote on the transaction.

Ethos Foundation, which represents pension funds and other institutional investors that own up to 5% of both banks, described the UBS takeover as “a huge waste for the shareholders and the Swiss economy”.

Updated

Lagarde: many firms have been able to raise their profit margins

Christine Lagarde told MEPs today that elevated profit margins have made “a noticeable contribution to domestic cost pressures” in the eurozone.

The ECB president told the European Parliament today that

Wage pressures have strengthened on the back of robust labour markets and employees aiming to recoup some of the purchasing power they have lost to high inflation.

Moreover, many firms have been able to raise their profit margins in sectors faced with constrained supply and resurgent demand. The energy price shock implies a hit to the domestic economy, which should be absorbed by both firms and workers in order to ensure that it does not lead to a spiral of upward price and wage adjustments.

She also supplied a chart showing how both wages and profits have been rising across the economy.

Increases in profit margins are an important issue for central bankers, given concerns about ‘greedflation’ fuelled by firms lifting prices.

Reuters: UBS mulling sweeteners for Credit Suisse wealth bankers

UBS are reportedly mulling offering sweeteners to Credit Suisse wealth bankers, to encourage them to stay on after the takeover.

Reuters reports that UBS Group told Credit Suisse wealth bankers it is weighing financial sweeteners for them to stay as it seeks to reassure key staff following the takeover, a person with knowledge of the matter said today.

In a town hall for Credit Suisse’s employees in wealth management in Zurich, Iqbal Khan, UBS’s president for global wealth management and Francesco de Ferrari, Credit Suisse’s CEO for wealth management, reassured staff on Monday that the two banks will all be acting as a “big family,” the person said.

During the townhall, the executives also said that there would be retention packages, most likely for front office staff without providing further details, the person said.

A spokesperson for UBS declined to comment.

Here’s a video clip of Christine Lagarde telling MEPs that the European Central Bank is monitoring market developments closely and stand ready to respond as necessary to preserve price stability and financial stability in the euro area.

Lagarde: We have tools needed to support banks

Over in Brussels, the head of the European Central Bank has told MEPs that eurozone inflation remains too high.

Christine Lagarde told the European Parliament’s committee on Economic and Monetary Affairs that eurozone annual inflation fell to 8.5% in February, thanks to a sharp drop in energy prices, but rather higher than the ECB’s target of 2%.

She warned that the ECB faces an “elevated level of uncertainty”, so will take a “data-dependent approach” when setting interest rates. Last Thursday, the ECB lifted its key interest rates by half a percentage point each.

Lagarde also touched on the Credit Suisse crisis, telling MEPs:

I welcome the swift action and the decisions taken by the Swiss authorities. These actions were instrumental for restoring orderly market conditions and ensuring financial stability.

Lagarde added that the ECB is monitoring market developments closely and ‘stand ready to respond as necessary” to protect price stability and financial stability in the euro area.

She added:

The euro area banking sector is resilient, with strong capital and liquidity positions.

In any case, the ECB’s 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.

Updated

First Republic shares slide

Shares in First Republic, the US regional bank, have tumbled by 15% in early Wall Street trading, just days after America’s banking giants agreed to prop it up.

First Republic, a mid-sized bank whose shares have been pummeled amid a wider banking turmoil, have dropped to $19.40, from $23.03 on Friday night.

The shares have lost 85% of their value in the last month.

Today’s losses come after First Republic’s credit ratings were downgraded deeper into junk status by S&P Global, which said the lender’s recent $30bn deposit infusion from 11 big banks may not solve its liquidity problems.

Updated

Wall Street has opened higher, as US investors react to last night’s rescue deal for Credit Suisse.

The Dow Jones industrial average has gained 332 points, or 1%, at 32,194.

Investment banks Goldman Sachs (+2.5%) and JP Morgan (+2.2%) are among the top risers on the Dow, along with pharmaceuticals group Merck (+2.6%) and construction equipment maker Caterpillar (+2.2%).

“Big Wall Street banks are benefiting from the Fed liquidy injections and the influx of deposits from former regional bank depositors,” explains Stephen Innes, managing partner at SPI Asset Management.

The broader S&P 500 index has gained 0.3%, while the tech-focused Nasdaq has dipped by 0.4%.

Bank of England confirms shares should be wiped out before bonds

The Bank of England has confirmed that holder of shares in UK banks would be wiped out ahead of holders of riskier AT1 bonds, following the surprise twist in Switzerland last night when this didn’t happen.

In a statement, the BoE says 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 BoE says this was used in the rescue deal for Silicon Valley Bank last week:

This was the approach used for the recent resolution of SVB UK, in which all of SVB UK’s Additional Tier 1 (AT1) and T2 instruments were written down in full and the whole of the firm’s equity was transferred for a nominal sum of £1.

Under the UK’s framework, those AT1 bonds (which are designed to be triggered if a bank hits trouble_ rank ahead of Common Equity Tier 1 (CET1), which includes common stock.

AT1 rank behind T2 (subordinated debt) in the UK’s framework.

The Bank says:

Holders of such instruments should expect to be exposed to losses in resolution or insolvency in the order of their positions in this hierarchy.

Updated

A former European Central Bank vice-president has warned that Swiss authorities “made a mistake” by wiping out Credit Suisse’s AT1 bonds in the rescue takeover by UBS, while preserving some shareholder capital.

Vítor Constâncio explained on Twitter that the Swiss authorities didn’t respect the agreed sequence, under which AT1 should be called-in only after equity was wiped out.

Rail strikes: RMT votes to accept Network Rail pay offer

Away from banking, the UK’s RMT union has announced that its 20,000 members have voted to accept a new and improved offer with Network Rail covering pay, jobs and conditions.

In a turnout of nearly 90 per cent members voted by 76 per cent to 24 per cent to accept the offer, the RMT says.

The vote means the end of the trade dispute with Network Rail, following strike action over many months, the RMT National Executive says.

The RMT says the deal includes:

  • An uplift on salaries of between 14.4 per cent for the lowest paid grades to 9.2 per cent for the highest paid

  • A total uplift on basic earnings between 15.2 per cent for the lowest paid grades to 10.3 per cent for the highest paid grades. This represents an additional 1.1 per cent over the duration of the deal

  • Increased backpay

However, the RMT is still in dispute with train operating companies.

RMT general secretary Mick Lynch says that “strike action and the inspiring solidarity and determination of members” has secured new money and a new offer from Network Rail.

Lynch adds:

“Our dispute with the Train Operating Companies remains firmly on and our members recent highly effective strike action across the fourteen train companies has shown their determination to secure a better deal.

Fears mount over ‘inevitable’ UK job losses at Credit Suisse after UBS takeover

Job losses are feared in the UK after the historic sale of Credit Suisse to its bigger rival UBS yesterday.

Credit Suisse employs around 5,500 people in the UK, based in London’s Canary Wharf, which includes investment bankers, wealth and asset managers, as well as staff across teams such as technology, risk and compliance.

UBS has said it plans to run down the investment bank division of Credit Suisse as part of its merger plans, and it seems inevitable that there will be job losses in the City.

The former chief executive of UBS in the UK, Mark Yallop, told Radio 4’s Today Programme that the merger, and the chopping back of the investment bank, is likely to hit Credit Suisse’s UK workforce.

Yallop said:

“The two firms together employ about 120,000 staff, of which about 11,000 sit in London, and I think it’s inevitable that a merger of this sort will result in some further job losses.

“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 firms is experiencing.

“And in middle-office, technology and operational roles where bringing two firms together will mean you can run one bigger firm, without doubling up the infrastructure needed to manage it.”

UBS has UK offices in London, Birmingham, Manchester, Leeds, Newcastle Upon Tyne and Edinburgh.

Updated

Credit Suisse bankers will still get bonuses despite UBS takeover

It’s emerged this morning that Credit Suisse staff will still receive their bonuses despite being taken over by UBS last night in an emergency rescue to avert a global banking crisis.

Staff got the good news that their “hard work” will be recognsed, in a memo sent by management today.

The Evening Standard has the details:

Q: Will my salary and any bonus still get paid on March 24?

A: Yes. There are no changes to payroll arrangements. We will pay salary and bonus, where outstanding, as per the previously communicated schedule. In many countries, the bonus has already been paid out and we do not expect any changes for remaining jurisdictions.

Q: I am expecting a salary increase as of April 2023, will this still happen?

A: We will continue to honor our obligations and already communicated salary increases will still be effective from April 2023.

Q: Will I receive a bonus for my hard work through 2023?

A: We will continue to allocate for a 2023 performance bonus for those eligible. We are committed to treat all employees fairly, any bonus plan will be based on both business and individual performance.

Government: UK banking system remains 'safe and well-capitalised'

Downing Street has said the UK banking system remains “safe and well-capitalised” following the takeover of troubled Credit Suisse by UBS last night.

The Prime Minister’s official spokesman said that Rishi Sunak has been regularly updated on the situation by the Treasury and the Bank of England, and has been in touch with the Swiss president.

“Obviously it is good that a resolution has seen secured,” the spokesman said, adding:

“As the Bank of England has said, we believe the UK banking system remains safe and well-capitalised.

“We have a strong regulatory system and we have taken a number of steps over the past 15 years, together with the Bank of England, to strengthen that system.”

As covered this morning, the BoE said last night that the UK banking system “remains safe and sound”.

UBS shares recover some ground

Shares in UBS have recovered some of their earlier losses, after European regulators tried to reassure markets about how risky bonds will be treated in future bank crises.

Having been down 12% at one stage, UBS’s stock is now down just 4.8% today.

This morning’s statement from Europe’s regulators, which appears to show concern that AT1, or CoCo, bonds were wiped out while shareholders took smaller losses, does seem to have calmed nerves.

Italy's economy minister surprised Credit Suisse shareholders prioritised over AT1 bond holders

Italy’s economy minister has said today he was surprised by the decision to give priority to Credit Suisse shareholders over bondholders in the UBS rescue deal, by controversially writing off $17bn of AT1 bonds.

Reuters has the details:

Speaking on the sidelines of an event in Milan, Italy’s Economy Minister Giancarlo Giorgetti said however that the impact of the Credit Suisse crisis on the Italian banking system was “insignificant”.

Some of the world’s largest central banks came together on Sunday to try to stop a banking crisis from spreading as Swiss authorities persuaded UBS Group to buy rival Credit Suisse in a historic deal.

The Swiss regulator, said the decision to write down to zero the Additional Tier 1 bonds would bolster the bank’s capital.

Oil is still down after a volatile session, as recession fears sweep the energy markets.

Brent crude is down 1.3% at $72 per barrel, having hit its lowest level since December this morning, while US WTI crude oil is down 1.5% at $65/barrel.

Charalampos Pissouros, senior investment analyst at XM, says oil could fall further if central banks continue to raise interest rates, slowing economic growth.

Pissouros explains:

The banking turmoil affected oil prices as well, with WTI falling to its lowest in 15 months on Monday as investors became increasingly worried that a crisis in the global banking sectors could trigger a severe recession that would further hurt demand for energy.

Another hike by the Fed on Wednesday could intensify those fears and perhaps push WTI down to the lows of December 2021, at around $62.00.

German economy heading for contraction in Q1, Bundesbank warns

The Bundesbank headquarters in Frankfurt, Germany.
The Bundesbank headquarters in Frankfurt, Germany. Photograph: Bloomberg/Getty Images

Germany’s economy will shrink again in the first quarter of the year, the country’s central bank, the Bundesbank, has predicted.

In its latest monthly report, just released, the Bundesbank says:

“German economic activity will probably fall again in the current quarter.”

“However, the decline is likely to be less than in the final quarter of 2022.”

German GDP shrank by 0.4% in the final quarter of 2022. A second consecutive drop in activity in the first three months of this year would put Germany into a technical recession.

The Bundesbank also forecast that inflation in Germany is likely to tumble in March as high energy prices get knocked out of year earlier figures.

But price growth will remain uncomfortably high, the Bundesbank warns:

“That being said, the core rate is proving exceptionally persistent.

It could even increase slightly towards the middle of the year.”

Germany: This is not 2008 again

German Chancellor Olaf Scholz welcomes the action taken by Swiss authorities to enable the takeover of Credit Suisse by UBS, a government spokesperson said on Monday.

The spokesperson told a regular news conference.

“Chancellor Scholz welcomes the resolve of the Swiss authorities.”

“The situation is not comparable to 2008/2009,” the spokesperson insisted, adding:

“The German banking system is well positioned.”

Calm returns, but fears of another selloff remain

Some calm has returned to the financial markets, after a choppy start to the morning after the emergency rescue of Credit Suisse last night.

The FTSE 100 index is now flat, having been down almost 2% at one stage in early trading.

Bank stocks have recovered some ground, after European regulators insisted that under their rules common equity would be wiped out before AT1 bonds were triggered (unlike in the Credit Suisse rescue, which alarmed investors).

Bank shares are still weak, though, as investors digest the ramifications of the UBS-CS deal.

Barclays (-3.5%), Standard Chartered (-3.3%), HSBC (-2.6%) and NatWest (-1.9%) are among the big fallers on the FTSE 100 index.

Patrick Ghali, managing partner of Sussex Partners, says it remains to be seen if the latest actions from policymakers are enough to stem what has become a crisis of confidence and whether further contagion can be contained.

Ghali explains:

The worry remains that markets continue to be stretched and fragile and anything could trigger a further sell off. The events over the last few days, including not just credit Suisse, but also other banks, show that things are perhaps not as robust as some have suggested.

The case for an economic contraction is becoming clearer by the day, and the consensus seems to be moving away from the wishful thinking of a soft landing. Investors need to watch liquidity and the knock-on effects of this extremely closely, also as it relates to private assets”.

A single eurozone bank borrowed just $5m from the European Central Bank through the new dollar swap facility set up by the major central banks last night, official details of today’s operation show.

Updated

BoE sees zero bids for dollars in new operation

The Bank of England has not received any requests for dollars through the new operation announced by the world’s top central banks last night.

According to Reuters, the BoE said it received no bids for dollar liquidity at a first daily seven-day repo operation that was launched on Monday.

That suggests that UK banks were not desperate to get their hands on US dollars this morning – an encouraging sign.

The dollar repo operation was part of the push to enhance liquidity of US dollars in the markets, through new swap lines.

Those swap lines are meant to provide low-risk short-term loans that ensure the world’s major economies have adequate supply of US dollars to meet local demands.

Eurozone regulators weigh in on AT1 bond wipeout

The euro area’s top financial regulators have just issued a statement, in an attempt to reassure markets that the Credit Suisse deal hasn’t changed their position on the hierachy of debt when a bank fails.

The Single Resolution Board, the European Banking Authority and ECB Banking Supervision say they welcome the “comprehensive set of actions taken yesterday by the Swiss authorities”.

The regulators then spell out to investors that their rules will force losses on equity holders, before moving onto investors holding AT1 bonds, despite the Credit Suisse deal inverting this order by wiping out its AT1, or CoCo, bonds (see previous post).

In what looks to be thinly-veiled criticism of the Swiss approach, the European regulators say:

The resolution framework implementing in the European Union the reforms recommended by the Financial Stability Board after the Great Financial Crisis has established, among others, the order according to which shareholders and creditors of a troubled bank should bear losses.

In particular, common equity instruments are the first ones to absorb losses, and only after their full use would Additional Tier One be required to be written down. This approach has been consistently applied in past cases and will continue to guide the actions of the SRB and ECB banking supervision in crisis interventions.

Additional Tier 1 is and will remain an important component of the capital structure of European banks.

Updated

CoCo bonds slide on concerns over Credit Suisse deal

Derivatives that track the value of riskier bank debt – the sort that is being wiped out in the Credit Suisse takeover – are falling sharply today.

Invesco’s AT1 Capital Bond exchange-traded fund , which tracks the value of AT1 debt issued by banks, is down 15% this morning.

A chart showing Invesco’s AT1 Capital Bond exchange-traded fund over the last five years
A chart showing Invesco’s AT1 Capital Bond exchange-traded fund over the last five years Photograph: Refinitiv

Those AT1 bonds, known as “contingent convertible” debt or CoCos, are designed to be triggered at times of market turbulence. They are basically shock absorbers to activate in a crisis – if a bank’s capital levels fall below a certain point in a crisis, AT1s are converted into equity, or written off.

As we’ve been covering this morning, investors are startled that Credit Suisse’s AT1 bonds are being written off, even though the bank’s equity is not totally destroyed (shareholders are taking a 60% haircut). Typically, AT1 bonds is meant to be above equity in the debt heirachy.

Neil Wilson, chief markets analyst at Markets.com, says this ‘blatant’ upending of the debt heirachy will have ramifications.

These are ‘contingent convertible’ bonds that are riskier than other debt instruments and designed to get wiped out in a crisis – or converted to equity. Usually this would be the same thing – like when Banco Popular got gobbled up by its national rival Santander in 2017 – the only precedent for the CS takeout.

However, shareholders in CS are getting something, even if it’s not much. Blatantly upending the hierarchy of debt will have ramifications and I think this is why we are seeing such a negative reaction in bank shares this morning.

Charles-Henry Monchau, chief investment officer at Syz Bank, fears there will be ‘spillover’ damage to global credit markets.

Monchau says:

According to the Swiss bail-in regime, AT1 debt is above equity in the loss absorption waterfall.

This is an arresting development, given that even unsecured bondholders usually rank above equity holders in the capital structure. So for equity holders to get “something” and CoCo bond holders to get “nothing” raises serious questions about the real value of CoCo bonds.

This is creating contagion risks on CoCos (see market action this morning in Asia – e.g Bank of East Asia 5.825% perpetual slumped 8.6 cents to 79.7 cents). There is also a risk of spillover effect on global credit (although we note that senior secured bonds seem quite resilient including CS senior secured bonds which are jumping in price this morning).

The UBS acquisition of Credit Suisse eliminates immediate tail risks in the banking sector, argues analysts at Jefferies, but it also raises questions.

In a research note this morning, they point to the fact that UBS shareholders were not asked for approval (because emergency powers were activated) and that holders of Credit Suisse’s AT1 bonds (risky debt) are being wiped out while shareholders aren’t entirely (which breaks the usual seniority for creditworthiness).

Jefferies say:

It’s positive news that a deal could be found as there were not many alternatives, and a nationalization or unwinding of CS would likely have increased sector risks.

However, in terms of sector ramifications, while this deal significantly reduces the immediate systemic risk from CS’ weaknesses, we think two key negatives elements will also catch the eye: (1) that CS’ AT1 holders are wiped out whereas shareholders are not entirely, though normally more junior in creditworthiness, and (2) that shareholder approval was not asked on UBS’ side for this deal.

We think the objective of this transaction, while solving CS’ situation & associated risks for the system, is to reach a win/win, where UBS shareholders also get value out of this deal over time.

The low price paid (CHF 3bn) and significant safety net provided to UBS (with government guarantee) are positive, while UBS’ strategy is unchanged. However, UBS embarks significant execution risk, litigation risk, the buyback is temporarily suspended (unclear how long), UBS’ capital requirement is likely to be revised up, and management focus will be captured by this deal for many quarters, maybe years.

Updated

Bank of England may not raise rates this week

The turmoil in the banking sector may deter the Bank of England from raising borrowing cost again this week.

The money markets this morning indicate that the BoE is more likely to not lift interest rates, than to push them higher, when it sets monetary policy on Thursday.

No Change from the Bank is seen as a 57% possibility, while a quarter-point hike from 4% to 4.25% is seen as a 43% chance.

The increases in interest rates by major central banks in the last year or so have already added to tensions in the markets. They pushed down US government bond prices, which was the cause of the losses at Silicon Valley Bank which failed earlier this month.

Bank failures typically precede a US recession, as our economics editor Larry Elliott explains here.

Markets jittery after UBS-Credit Suisse deal: What the experts say

Bank bonds are sliding after Swiss authorities decided to wipe out Credit Suisse’s riskier bonds as part of the rescue package, explains Alvin Tan of RBC Capital Markets.

Tan says:

The biggest one was UBS’ acquisition of Credit Suisse, supported by a CHF9bn guarantee from the Swiss government to cover potential losses from specific business lines.

However, the Swiss regulator’s decision to write-down completely CS’ additional Tier 1 bonds has sparked a selloff in bank bonds globally.

After months of uncertainty, client withdrawals, a sliding share price and existential angst, UBS’ takeover comes as a relief for Credit Suisse, says Victoria Scholar, Head of Investment at interactive investor.

However its shares are still sharply lower and its bondholders face much uncertainty, Scholar explains:

Credit Suisse’s CoCo bonds, high-yield investments which are a cross between a stock and a bond have been written off, landing its AT1 bondholders with hefty losses. This has sparked nervousness about AT1 bonds more broadly with some investors retreating from them altogether.

Credit Suisse is a 167 year old institution that has been instrumental to the growth of the Swiss economy. The end of its history marks a sad day for longstanding employees and loyal customers. There will be hard yards ahead for UBS to successfully implement the takeover. Credit Suisse is likely to be vastly reduced to only its most profitable components.

UBS’ acquisition has done little to allay the market’s unease with banks nursing painful losses across Europe on Monday. Credit Suisse has opened down by more than 60% and UBS is down by over 8%.

Banks including Deutsche Bank, Commerzbank and BNP Paribas are trading sharply lower with German banks understood to have direct financial exposure of at least $11.5 billion to Swiss banks. Banks on the FTSE 100 like StanChart, Barclays and NatWest are languishing at the bottom of the UK index.”

Stephen Innes, managing partner at SPI Asset Management, says the markets risk being pulled into a ‘horrible negative feedback loop’, as authorities take action to (they hope) stem the crisis [such as the new dollar swaps announced last night].

No, if and or buts; price action in oil and safe-havens gold and yen suggests folks are still spooked, hinting we are in the process of devolving from a bank to an economic crisis when growth becomes more concerning than the crisis itself.

And if that proves accurate, a negative equity-bond correlation should see gold push higher and oil continues to tank.

Compounding matters is that the more policymakers do, the more investors expect bad news to come down the pipe, which creates a horrible negative feedback loop, almost as if investors are asking themselves “what do they know we do not know?”

Updated

The cost of insuring UBS Group debt against default has risen after it agreed to buy Credit Suisse.

UBS’s five-year credit default swaps, derivatives which are often used to gauge a borrower’s credit risk, widened to 153 basis points from 117bps on Friday, according to S&P Global Market Intelligence data.

UBS shares slide 9%

Shares in UBS have dropped by 8.7% in early trading, as investors react to its cut-price takeover of Credit Suisse.

Shares in Credit Suisse have tumbled by over 60% at the start of trading.

They have plunged to 0.7 Swiss francs, down from 1.86 Swiss francs on Friday night.

That takes them down to the level UBS’s cut-price rescue package (0.76 Swiss francs per share in its own stock), and on track for their biggest one-day fall ever.

European banking stocks are down 3.2% to their lowest level in three months.

FTSE 100 hits lowest since November

European stock markets are open, and falling as investors give their verdict on last night’s emergency rescue of Credit Suisse.

In London, financial stocks are leading the fallers, with Standard Chartered down 6.6%, Barclays off 5.6%, Prudential off 4.3%, NatWest falling 3.8% and Lloyds Banking Group down 3.5%.

This has pulled the FTSE 100 index down by around 0.75% in early trading, to 7281. That’s its lowest point since last November.

Other European banks are also falling, with Deusche Bank down 6%, BNP Paribas falling 4.2%, and Société Générale dropping 4.4%.

Updated

UBS CEO says bank can handle risks of Credit Suisse takeover

The chief executive of UBS has insisted this morning that his bank can handle the takeover of Credit Suisse.

Ralph Hamers told broadcaster SRF that UBS could handle the risks of combining with Credit Suisse.

Hamers said (via Reuters).

“We have a very good capital ratio at UBS, and we also have a very good liquidity position. So we have contained the risks in the markets.

“The second step for us is to transform CS’s investment bank into an investment bank like UBS has. We call this a capital-light investment bank. In doing so, we are not taking so much risk.”

Hamers did not have any information about potential lay-offs at Credit Suisse, saying that there are no definite plans at present.

“There are certainly opportunities and chances for growth.

The many employees - CS has 50,000 worldwide - also have a new future together with us. And together we can build an even more beautiful bank.”

The many scandals at Credit Suisse in recent years have tainted Switzerland’s financial sector. But Hamers added that the takeover would ‘uphold’ the reputation of the Swiss financial market, and also provide stability and security for Credit Suisse clients.

Hamers said:

“The takeover means that we are bringing back stability and security for CS clients.

“But also that we are upholding the reputation of the Swiss financial centre.”

Updated

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.”

Updated

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!

Updated

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.

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

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