Japan Tries To Play It Cool

On Monday, Japan's top government spokesperson reassured the markets that the country's banking system was stable and would not be affected by the banking sector woes in the US and Europe. Chief Cabinet Secretary Hirokazu Matsuno also welcomed the decision made by the top central banks, including the Bank of Japan (BOJ), to expand an existing swap line to ensure that lenders have enough dollars to operate.

  • However, Asian stocks struggled to stabilize, indicating that the weekend rescue deal for Credit Suisse and concerted central bank action offered little lasting respite from fears of a bigger banking crisis
  • Despite this, Japanese policymakers believe that domestic banks have enough capital buffers to absorb losses caused by external factors, including risks from the collapse of US lenders

The current global market rout is further complicating the task of the incoming BOJ Governor Kazuo Ueda, who needs to steer a smooth exit from ultra-low interest rates that have drawn criticism for pushing financial institutions to take on risk in the search for yield. The BOJ board discussed the side-effects of easy policy in March, even as it decided to maintain ultra-low rates, according to a summary of opinions at the meeting released on Monday.

UBS Stages A Comeback

UBS experienced a remarkable recovery on Monday afternoon, after initially suffering significant losses due to its "emergency rescue" of Credit Suisse. UBS shares finished the session 1.2% higher, compared to the losses of over 14% experienced earlier in the day, whilst Credit Suisse's shares closed more than 55% lower. Europe's banking index also rose by 1.2% by the end of the session, as market calm appeared to return.

  • The volatile situation follows UBS's agreement to acquire Credit Suisse in a cut-price deal, in an effort to prevent contagion risks to the global banking system
  • Swiss regulators supported the deal, given the size and international presence of Credit Suisse, with a balance sheet of around 530 billion Swiss francs at the end of last year
  • Credit Suisse's balance is two times bigger than that of Lehman Brothers when it collapsed

The combined bank will be a huge lender with more than $ 5 trillion in total invested assets, according to a statement by UBS.

Equity Before Bonds

Credit Suisse's AT1 bondholders are likely to lose their investments worth 16 billion Swiss francs ($17 billion) as a result of the bank's takeover by UBS, according to a FINMA announcement made on Sunday. Additional tier-one bonds are seen as relatively risky investments, and will be written down to zero as part of the deal.

  • This decision has caused AT1 bondholders to be upset as their investments have been lost while shareholders receive payouts as part of the takeover
  • Goldman Sachs' credit strategists believe that the decision means that AT1 bondholders are subordinated to shareholders, with this being the largest loss ever inflicted on AT1 investors since the asset class's inception after the global financial crisis

However, the move should not be a surprise, as AT1s are supposed to absorb losses, according to Elisabeth Rudman, global head of financial institutions at DBRS Morningstar.

Disclaimer

Please note that this article does not constitute investment advice in any form. This article is not a research report and is not intended to serve as the basis for any investment decision. All investments involve risk and the past performance of a security or financial product does not guarantee future returns. Investors have to conduct their own research before conducting any transaction. There is always the risk of losing parts or all of your money when you invest in securities or other financial products. Please note that the writer of this article is not registered as a financial advisor.

Photo by Miquel Parera on Unsplash.