Swiss authorities announced at the weekend that UBS would acquire its smaller rival as regulators try to ease fears about banks following the collapse of two US lenders. Central banks announced co-ordinated efforts to stabilise lenders, including a facility to borrow US dollars if necessary, with the Bank of England insisting that banks are “safe”. However, investors fear banks are cracking under the strain of unexpectedly fast, large rate increases over the past year to cool economic activity and inflation. A decision by the Bank of England on whether to raise interest rates again later this week is now on a knife edge.
The UK’s benchmark FTSE-100 index was down about 100 points or 1.4 per cent in early trading in London with banking stocks under pressure. Hong Kong’s main index slid more than 3 per cent, market benchmarks in Frankfurt and Paris opened down more than 1 per cent and Shanghai, Tokyo and Sydney also declined.
Richard Hunter, head of markets at Interactive Investor, said financial stocks had yet to find a bottom. He noted: “Markets are set for another bumpy ride this week, despite a couple of developments at the weekend designed to stem the tide of sellers among financial stocks. This now leaves markets at a potential inflection point. On the one hand, there is little question that banks are better equipped to deal with financial shockwaves than at the time of the Great Financial Crisis, due to a combination of regulatory tightening and in particular the strength of the larger banks’ balance sheets and capital cushions. By the same token, 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.”
Susannah Streeter, head of money and markets at investment platform Hargreaves Lansdown, said: “It is not yet known exactly where more pain will emerge in the banking sector, but investors fear the problems are not yet over. Shares in Standard Chartered and HSBC listed in Hong Kong fell by 7 per cent after immediate relief at the Credit Suisse deal evaporated. Smaller lenders will be in focus again, particularly in the US, after First Republic Bank shares tanked by more than 30 per cent despite the $30 billion lifeline given to it by large US banks. Bigger lenders are still considered to be much better insulated from the chill winds still blowing through the banking sector.”
The Swiss government said UBS will acquire Credit Suisse for almost $3.25bn (£2.67bn) after a plan for the troubled lender to borrow as much as $54bn from Switzerland’s central bank failed to reassure investors and customers. US regulators have also tried to calm fears over threats to banking systems. The Federal Reserve said cash-short banks had borrowed about $300bn in the week up to Thursday.