Swiss bank rescue eases market fears

Stocks climbed on Monday 20th March 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 FTSE 100 closed up 68 points higher, after starting the day firmly in the red. London-listed banking shares also mainly recovered to positive territory, after a heavy sell-off first thing. Standard Chartered and Barclays were still down, by 3% and 2.3% 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%.

US banking stocks were also up in early trading, with the notable exception of shares in First Republic Bank, which slumped more than 17%, after reports it may need to raise more funds despite a $30bn (£24bn) rescue last week. That bailout encompassed 11 of the biggest names in US banking, including JPMorgan Chase, Citigroup, Bank of America and Goldman Sachs.

On Monday 20th March, the Wall Street Journal reported that the JP Morgan chief executive, Jamie Dimon, was leading talks with the other bank bosses to pump more cash into the ailing San Francisco-based lender. The earlier jitters on European markets were partly prompted by the terms of the rescue deal, which saw holders of $17bn of Credit Suisse’s bonds 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 $30bndeposit 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.

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Sources: Techlink