LAST UPDATE | 20 Mar 2023

LONDON STOCK MARKETS fell today after Swiss authorities arranged the takeover of troubled Credit Suisse amid fears of a global banking crisis.

The FTSE 100, London’s top, lost close to  2% of its value this morning after Swiss authorities announced the rescue deal. 

The index fell by as much as 129 points shortly after the markets opened, led lower by the biggest banks in the country. 

Standard Chartered saw its shares fall by more than 7% at one point, while Barclays was just under 6% down.

Asian stock markets have also been impacted by the damage to the banking sector as shares in Hong Kong have fallen by more than 3%, potentially indicating another grim week ahead for global markets. 

Ahead of a Federal Reserve meeting to decide on more possible interest rate hikes, markets in Hong Kong, Tokyo and Sydney declined, while in Shanghai, stocks edged up. Oil prices also retreated.

Swiss authorities announced yesterday that UBS would acquire its smaller rival Credit Suisse as regulators try to ease fears about banks following the collapse of two US lenders.

Uncertainty in the banking sector

Heavy uncertainty has gripped the banking sector ever since the US’s 16th largest lender, Silicon Valley Bank, said it needed to raise money to stay afloat.

Since then shares in London’s FTSE 100 index have fallen by close to 9%, and several other banks in the US and Europe have struggled to keep their doors open.

Michael Hewson, chief market analyst at CMC Markets, said: “Having come off the worst week for European equity markets this year, volatility looks set to continue this week now that the fate of Credit Suisse appears to have finally been sealed.

“With Credit Suisse shareholders and some bondholders taking a huge hit, banks in Asia have taken a hit on similar concerns about (some of their) bond-holding values, while the weekend deal still presents the Swiss National Bank and Swiss government with untold headaches, with the size of the newly merged bank set to dwarf the size of the Swiss economy.”

He added: “The phrase ‘too big to fail’ really does spring to mind here, and this morning’s weakness in Asia markets serves to reinforce concerns about these types of writedowns and any spillover effects on the rest of the banking sector.”

Central banks have announced coordinated efforts to stabilise lenders including a facility to borrow US dollars if necessary.

Investors worry banks are cracking under the strain of unexpectedly fast, large rate hikes over the past year to cool economic activity and inflation.

That caused prices of bonds and other assets on their books to fall, fuelling unease about the industry’s financial health.

“Investors are waiting to see where the dust settles on the banking saga before making any bold moves,” Stephen Innes of SPI Asset Management said in a report.

The Swiss government said UBS will acquire Credit Suisse for almost $3.25 billion dollars after a plan for the troubled lender to borrow as much as $54 billion from Switzerland’s central bank failed to reassure investors and customers.

US regulators have also sought to calm fears over threats to banking systems. The Federal Reserve said cash-short banks had borrowed about $300 billion from the Federal Reserve in the week up to Thursday.

Separately, New York Community Bank agreed to buy a significant chunk of the failed Signature Bank in a $2.7 billion dollar deal, the Federal Deposit Insurance Corp (FDIC) said late announced. The FDIC said $60 billion in Signature Bank’s loans will remain in receivership and are expected to be sold off in time.

That fuelled concern about other lenders with shaky finances. Credit Suisse is among 30 institutions known as globally systemically important banks. 

The unexpectedly large, fast rate hikes by the Fed and other central banks to cool inflation that is close to multi-decade highs have caused prices of bonds and other assets on their books to fall.

Traders expect last week’s turmoil to push the Fed to limit a rate hike at its meeting this week to 0.25 percentage points. That would be the same as the previous increase and half the margin traders expected earlier.