Banking stocks bounce back after Credit Suisse rescue rattles investors

Stocks climbed yesterday in London and New York – with the notable exception of shares in the San Francisco-based First Republic Bank – after central banks and politicians sought to soothe jitters triggered by the emergency rescue of Credit Suisse over 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 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 Bank of England said.

The prime minister’s official spokesperson also sought to offer reassurance, telling reporters the British banking system “remains safe and well capitalised”.

The FTSE 100 closed 68 points higher, after starting the day firmly in the red. London-listed banking shares also largely recovered to positive territory after a heavy selloff at the outset. 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 finished up 1% yesterday after falling 3% during the morning. UBS rebounded and was up 1% after the deal to rescue its fellow Swiss bank and rival Credit Suisse. Credit Suisse was down 52%.

US banking stocks were also up, but it was a torrid day for First Republic Bank, which crashed more than 46% after reports that 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. Yesterday, the Wall Street Journal reported that JP Morgan’s chief executive, Jamie Dimon, was leading talks with the other bank bosses to pump more cash into the ailing San Francisco-based lender.

The losses followed a further downgrade to First Republic Bank’s debt by S&P Global. Moving the bank’s credit rating further into junk territory, S&P said the lender’s recent $30bn deposit infusion may not solve its liquidity problems.

The earlier jitters on European markets were partly prompted by the terms of the Credit Suisse rescue deal, which saw holders of $17bn (£14bn) of Credit Suisse’s bonds – additional

‘The situation is not comparable to 2008. German banking is well positioned’

A spokesperson for the chancellor, Olaf Scholz

tier 1s (AT1s) – wiped out, while equity investors were not as badly affected.

The 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.

Eurozone regulators also issued a statement yesterday morning in an attempt to reassure markets that the Credit Suisse deal had not changed their position on the hierarchy of debt when a bank fails. The Single Resolution Board, the European Banking Authority and ECB Banking Supervision said they welcomed the “comprehensive set of actions taken by the Swiss authorities”.

They then spelled out to investors that they would force losses on equity holders before investors holding AT1 bonds, despite the Credit Suisse deal inverting this order by wiping out its AT1, or “CoCo”, bonds.

The German chancellor, Olaf Scholz, added his voice to the chorus of leaders welcoming the action by Swiss authorities over the weekend, while also noting the stability of Germany’s banking system: “The situation is not comparable to 200809,” his spokesperson said. “The German banking system is well positioned.”

The various moves appeared to ease concerns, with all big European indices turning positive after the statement was issued, having been negative when trading began yesterday morning.

While investors’ nerves appeared to steady somewhat, concerns over what the UBS-Credit Suisse tie-up would mean for jobs began to build.

London’s Canary Wharf is home to about 5,500 Credit Suisse employees, ranging from investment bankers and asset managers to technology and risk and compliance teams.

UBS’s UK former chief executive Mark Yallop told BBC Radio 4 he thought job losses were “inevitable” in the merger. UBS has offices in London, Birmingham, Manchester, Leeds, Newcastle and Edinburgh.

However, concerns about future job prospects will not stop staff receiving bonuses at Credit Suisse.