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

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:

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.

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.

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 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”.

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.

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.

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.

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.

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%.

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.