If the Swiss National Bank’s plan when it forced Credit Suisse to merge with UBS was to spark a full-blown global bank crisis, it’s hard to argue that it’s not done a good job.
European and US bank shares were tanking today, with experts laying blame fairly and squarely on the deal by the SNB to rescue Credit Suisse.
As part of the deal, the SNB deemed US$17bn of AT1 or CoCo bonds issued by Credit Suisse as worthless.
Never mind the nuances of whether shareholders, who got US$3.25bn, rank higher than bondholders, in a stroke the SNB made all other banks’ AT1s worth an awful lot less.
Yields have soared to 25% in some cases as investors dump AT1s rather than be caught with a potentially worthless holding in the next failure.
And the implications of a big chunk of bank finance disappearing are now being played out across stock markets in the US and Europe.
Deutsche Bank, a sizeable AT1 issuer, has been hardest hit, with shares down 13% today as analysts have questioned its financial strength.
"Deutsche Bank has been in the spotlight for a while now, in a similar way to how Credit Suisse had been," Stuart Cole, head macroeconomist at Equiti Capital told Reuters.
"The fallout from the wipeout of AT1 bonds in the CS rescue has raised questions about a key part of bank funding, which makes the problems DB has been facing that much more difficult to overcome," Cole said.
Credit default swaps for a number of leading European banks, a proxy for how risky investors regard a bank’s debt, have also soared.
Deutsche Bank’s CDS jumped 173 basis points on Thursday night from 142 basis points the previous day.
Even UK banks, which have not so far been directly affected by the Credit Suisse rescue were under the cosh.
In London, Barclays, NatWest, Standard Chartered and HSBC were down 6.5%, 6.0%, 5.8% and 4.5% respectively.
In Europe, the pain was even greater with the Euro Stoxx banks index down 6.2% as Deutsche Bank fell 13.5%, Commerzbank 8.5%, Société Générale 7.7%, BNP Paribas 7.1% and UBS 8.1%.
Europe’s central bank is expected to push for a full deposit insurance scheme similar to the US in the event any bank does fail.
US banks, too, are under pressure with the latest Fed data showing central bank emergency funding rocketing as banks struggle to find liquidity.
Wednesday saw US$110.2bn of lending plus a further $53.7bn from the Fed's new Bank Term Funding Program, which analysts said suggests getting funding is becoming tougher.
Worries about US commercial real estate lending due to the weakness in office demand have added to the unease.
According to analysts at Bank of America, commercial mortgage spreads are the highest since May 2020.
Deutsche Bank is also said to be a heavy lender to US commercial property.