June 5, 2023

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Central banks continue to raise interest rates amid banking turmoil

(Reuters) – The Bank of England on Thursday followed the Federal Reserve and the Swiss National Bank in raising interest rates, as policymakers continued their fight against inflation in the face of instability that has gripped the global banking system this month. .

Investors wondered if central banks could push for a tightening policy after the collapse of two US lenders earlier this month sent turmoil at banks around the world, knocking out one of Europe’s biggest banking names at Credit Suisse. AG (CSGN), 167. s).

After its 11th consecutive hike, the Bank of England said it had noticed “big and volatile moves” in financial markets, but that Britain’s banking system remained resilient.

“(The Monetary Policy Committee) will continue to closely monitor any impact on the credit conditions faced by households and businesses, and thus the impact on the overall economy and inflation expectations,” she added.

While recent market tensions have eased, they have encouraged investors to adjust to more difficult economic and lending conditions ahead.

The index of major European banks (.SX7P) fell 1.7%, with German banking giants Deutsche Bank (DBKGn.DE) and Commerzbank (CBKG.DE) falling 2.1% and 3.2%, respectively. London-based HSBC (HSBA.L) fell 2.5%.

Troubled US regional bank First Republic rose 2% in pre-market trade after falling on Wednesday.

Other US banks under scrutiny PacWest Bancorp (PACW.O), Truist Financial Corp (TFC.N) and Western Alliance Bancorp (WAL.N) rose between 0.8% and 3%.

Earlier on Thursday, the Swiss National Bank raised its benchmark interest rate by 50 basis points and said Credit Suisse’s takeover by Swiss rival UBS (UBSG.S) averted financial disaster.

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Swiss authorities urged banks to cooperate and provided financial guarantees of up to 260 billion Swiss francs ($280 billion) to complete the deal.

“At the moment, the focus should be that we can maintain financial stability and that the conclusion of the deal is smooth and fast,” SNB President Thomas Jordan told a news conference.

bank bond pressure

European central banks raised interest rates a day after the Federal Reserve raised another quarter point, with Federal Reserve Chairman Jerome Powell saying banking industry stresses could lead to a credit crunch with “significant” implications for a slowing US economy.

Citigroup downgraded the credit rating of the banking sector in Europe, warning that the rapid pace of interest rate hikes would affect economic activity and lenders’ profits.

“The fundamentals of the European banking sector appear sound. However, the ongoing crisis of confidence may reduce banks’ appetite for risk and reduce the flow of credit,” said equity strategists at Citigroup.

The US regional banks market capitalization is included in the S&P 500 Regional Banks Index

The Credit Suisse bailout, which followed the collapse of New York-based Silicon Valley Bank (SIVB.O) and New York-based Signature Bank (SBNY.O), has raised broader concerns about investor exposure to a fragile banking sector.

FINMA, the Swiss financial market regulator, on Thursday defended its decision to impose heavy losses on some Credit Suisse bondholders as part of its bailout, saying the move was legally airtight.

The decision to prioritize shareholders over Tier 1 (AT1) bondholders has sparked the $275 billion AT1 bond market and some Credit Suisse AT1 bondholders have been seeking legal advice.

Convertible bonds are designed to be invoked during bailouts to prevent the costs of bailouts from falling on taxpayers as they did during the 2008 global financial crisis.

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“AT1 instruments issued by Credit Suisse contractually provide that they will be fully written down at a ‘feasibility event’, in particular if exceptional government support is granted,” FINMA said.

Sharp declines in bank stocks following the elimination of Credit Suisse’s AT1 bond holders have prompted European supervisors to rush to the defense of the anti-crisis tool.

Policy makers in Asia are also seeking to calm investor nerves over AT1 bonds but the ongoing turmoil is likely to sustain new debt sales.

The central banks of Hong Kong and Singapore have said they will stick to the traditional hierarchy of creditor claims if the bank were to fail in their jurisdictions.

Two sources told Reuters that the volatility may prompt at least two Japanese banks, Mitsubishi UFJ Financial Group (8306t) and Sumitomo Mitsui Financial Group (8316t), to suspend the issuance of AT1.

Policymakers from Washington to Tokyo stressed that the turmoil is different from the crisis 15 years ago, saying banks are better capitalized and money is more readily available.

However, some observers warn that the banking system is more vulnerable to rumors and quick moves in an age of widespread social media use, posing a challenge for regulators trying to quell the instability.

Jane Fraser, CEO of Citigroup Inc. (CN), told the Economic Club of Washington, D.C., on Wednesday that social media is a “total game changer” in bank management.

($1 = 0.9280 Swiss francs)

Reporting by Reuters offices. Written by Toby Chopra; Editing by Tomasz Janowski

Our standards: Thomson Reuters Trust Principles.