Credit Suisse scandal diminishes market relief and exposes bond risks!

Bank stocks fell on Monday as the initial calm following a historic Swiss-backed bailout deal to rescue troubled Credit Suisse by rival UBS Group ebbed, and fresh worries emerged over the risks of high-yield debt issued by major banks.

In a package supervised by Swiss authorities announced on Sunday, UBS will pay 3 billion Swiss francs ($3.23 billion) to buy Credit Suisse, which was founded 167 years ago, and will incur losses of up to $5.4 billion.

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Facing a crisis of confidence in the financial system in Spreading rapidly, major central banks also sought to boost the flow of liquidity into the global banking system on Sunday with a series of coordinated currency swaps to ensure banks get the dollars they need to conduct their operations, according to Reuters.

While these moves appeared to have boosted investor confidence in early Asian trading, the rally quickly faded as attention shifted to the massive losses some Credit Suisse bondholders reportedly suffered in following the acquisition operation.

According to the agreement, the financial sector regulator in Switzerland has decided to estimate a zero the value of additional first-class bonds issued by “Credit Suisse” with a face value of $17 billion, which angered some bondholders who thought they would get more protection than shareholders get in an agreement. The acquisition was announced yesterday, Sunday.

Concerns about what the move could mean for additional first-tier bonds issued by other banks have added to lingering concerns about a range of risks, including the fallout from the crisis via the banking sector, the fragility of local US banks, and the risk moral.

Shares of ‘Standard Chartered’ and ‘HSBC’ fell more than 6% each in Hong Kong Monday to record low in more than two months, as ‘HSBC’ faces the possibility of posting the biggest drop in one day in six months. The “MSCI” index of stocks of the financial sector in Asia, excluding Japan, decreased by 1.3%.

“It should be clear that this crisis, after more than a week of banking panics and two government interventions, is not going away. On the contrary, it has spread globally,” said Mike O’Rourke, chief market Jones Commerce strategist.

“News of UBS’s acquisition of Credit Suisse is likely to put Credit Suisse’s problems under the microscope by transferring it to UBS,” he added.

Coordinated Intervention

Massive government guarantees back Switzerland’s enforced bank merger to help prevent what would have been one of the biggest bank meltdowns since the collapse of Lehman Brothers in 2008.

Pressure on UBS helped seal a deal on Sunday.

“This is a historic day in Swiss. Frankly, a day we could not have hoped for,” UBS chairman Colm Kelleher told reporters on a conference call.

“Let me clarify that while we did not initiate the talks, we believe this transaction is financially attractive to UBS shareholders,” he added.

UBS chief executive Ralph Hammers said there were still many details that have not yet been agreed upon.

“I know there must be questions that we don’t have answers to yet. I understand that and I also want to apologize for that,” he continued.

In a global reaction not seen since the pandemic was at its peak, the Federal Reserve (the central bank of the United States) said it had joined the central banks of Canada, England, Japan, the European Union and Switzerland in a coordinated measure to improve market liquidity. The European Central Bank pledged to provide loans to shore up eurozone banks if needed, adding that Switzerland’s bailout of Credit Suisse was “important” in restoring calm.

Credit Suisse’s operations appeared to proceed normally at its Asian headquarters on Monday.

Persistent Problems

The US banking sector is still feeling some woes, as pressure on bank stocks continued despite a move by several major banks to deposit $30 billion into First Republic Bank, which was hit by the collapse of Silicon Valley and Signature banks.

On Sunday, Standard & Poor’s Global downgraded First Republic’s credit rating and said a deposit injection might not solve its liquidity problems.

There are also concerns about what will happen to Credit Suisse and what that means for investors, clients and associates.

Credit Suisse said in a note to employees that after the acquisition is complete, some of the Wealth Management department’s clients may wish to transfer some of their assets to another bank if they have concerns about the concentration of their assets in a bank.

The deal will also make UBS the only global bank in Switzerland, and the Swiss economy will become more dependent on the bank.

The chairman of the board of directors (UBS) said in a news conference that the bank would reduce the investment banking business of “Credit Suisse”, which includes thousands of employees in Worldwide. UBS said it expects to save about $7 billion in annual costs by 2027.

Credit Suisse shares lost a quarter of their value last week. The bank has been forced to draw on $54 billion in central bank funding as it tries to recover from scandals that have eroded investor and customer confidence in it.