Shares in Credit Suisse have fallen by more than 60 per cent, following a deal at the weekend that involves a takeover by Swiss rival UBS.
At one point on Monday morning shares in UBS dropped by 14 per cent, but they later recovered to trade about 5 per cent lower.
In an effort to reduce volatility and prompt calm on the markets, senior central bankers and politicians in Europe said that the problems of Credit Suisse and the related issues in the banking sector in US, following the collapse of Silicon Valley Bank, will not spread to European banks.
Bank of France Governor Francois Villeroy de Galhau told France Inter radio that Credit Suisse and the issues with US banks “don't concern French and European banks”.
Meanwhile, Germany's financial regulator BaFin said that the country's banking system remains stable and robust.
French Economy Minister Bruno Le Maire welcomed the takeover, saying: “I'm delighted with this deal. It's a good deal.”
“At the same time, [Credit Suisse] is a heavyweight in Europe, so we will remain extremely vigilant about the reaction of the markets,” he said.
Italy's Economy Minister Giancarlo Giorgetti said that the impact of the Credit Suisse crisis on the Italian banking system was “insignificant” and that the situation in Europe was stabilising.
“It seems to me that the markets have calmed down a bit now, I think the situation in Europe is under control”, he said.
Nonetheless, investors took flight from Credit Suisse shares and bonds from early on Monday, after UBS agreed at the weekend to take over the 167-year-old bank for a fraction of its market value.
The deal included support from the Swiss government.
While Credit Suisse shares slid 62 per cent in morning trading, the value of its additional tier 1 (AT1) bonds dropped as low as 1 cent on the dollar, after the bank said 16 billion Swiss francs worth of the debt will be written down to zero.
AT1 bonds are designed to take the brunt of losses during a crisis, but are also considered to be the riskiest type of debt banks can use.
Hundreds of billions of dollars worth of AT1 bonds were issued following the 2008 financial crisis, as part of global moves by regulators to transfer the risk of bank failure to investors in bonds exposed to write-downs in a crisis, rather than shareholders.
Bondholders in Credit Suisse were angered on Sunday when it was announced that the debt was being written down on the orders of the Swiss regulator as part of the rescue by UBS.
The bond write-down at Credit Suisse is the biggest so far of AT1 debt, beating a similar situation during the collapse of Banco Popular in Spain in 2017.
AT1 bonds are mostly owned by large institutional investors and hedge funds, but in Asia they are also popular with retail investors.
UBS to buy Credit Suisse
But analysts said the fallout from the AT1 write-downs is unlikely to have a big effect beyond Credit Suisse and UBS shares on the Swiss stock market.
“In theory, there is no reason for the Credit Suisse crisis to extend, as what triggered the last quake for Credit Suisse was a confidence crisis — which doesn't concern UBS — a bank outside of the turmoil, with, in addition, ample liquidity and guarantee from the SNB [Swiss National Bank] and the government,” said Ipek Ozkardeskaya, a senior analyst at Swissquote Bank.
In a package overseen by Swiss regulators on Sunday, UBS will pay 3 billion Swiss francs ($3.23 billion) for Credit Suisse and assume up to $5.4 billion in losses.
At Friday's close, Credit Suisse had a total market value of $8 billion. Six months ago, it was worth $13 billion.
But while regulators and many analysts were adamant that the fate of Credit Suisse was in no way contagious, a senior Swiss politician pointed out that the newly merged entity would be an enormous risk for Switzerland.
“The new UBS is also another massive risk — it's going to have more than 1,500 billion francs in assets, and it's simply too big for Switzerland,” said Roger Nordmann, leader of the Social Democrats in the Swiss parliament.
The Social Democrats are the second biggest party in the Swiss parliament and have two ministers in the cabinet.
'Ghost train for investors'
Meanwhile, as worries emerged around exposure to investments like AT1 bonds, banking shares moved lower across Europe.
In London, bank shares initially slumped by more than 3 per cent, but recovered later in the morning.
The likes of Lloyds and Barclays had regained much of the ground they lost, although shares in HSBC and Standard Chartered continued to struggle.
“The scale of the response from central banks at the weekend acknowledges gaps in the system, which will leave many investors unwilling to revisit financial stocks until such time as the full extent of the problem is known,” said Richard Hunter, head of markets at Interactive Investor.
“It means the banking crisis we’ve seen over the past few weeks has started a new chapter rather than reaching its ending,” said Russ Mould, investment director at AJ Bell.
“So far March has been like a ghost train for investors. Every time they turn a different corner, some new horror screams in their face. Many investors now want to get off the train and that’s evident by them hiding in classic areas deemed to be market safe havens.
“We’re talking gold miners, utilities, consumers goods and even rat catchers, pockets of the market that offer some reassurance when everything else seems terrible. That’s why [on the London market] Endeavour Mining, Severn Trent, Unilever and Rentokil were in demand at the start of the week.”
Gold exceeded the $2,000 an ounce level for first time in more than a year, hitting its highest level since Russia invaded Ukraine.
“How much further gold can gain will largely be determined by how many more financial institutions have to be bailed out or fail in the coming days,” said Rupert Rowling, analyst at trading group Kinesis.
But it was the safe-haven stocks that provided the strength for most of the main European indices to shrug off the dragging effects of their banking stocks by lunchtime.
How many more?
However, that did not stop analysts and traders asking the crucial question: Are there other Credit Suisses or Silicon Valley Banks (SVB) out there?
Even if there are not and the central bankers, the politicians and the analysts are all correct, it will still take the markets some time to settle.
“Investors are likely keeping a look over their shoulder for the next disaster in a high-interest rate (and inflationary) environment, so at best we might see markets recover some of last week's losses,” said Matt Simpson at City Index.