Proactive Investors - The Federal Reserve and other global central banks have announced fresh measures to improve US dollar liquidity as global financial markets reel from the turmoil hitting the banking sector.
In a joint statement released on Sunday, the world’s leading central banks said that they will launch daily operations to make funding available via standing swap lines. Previously, those operations were conducted on a weekly basis.
The Fed, European Central Bank, Bank of England and the Swiss National Bank are among those involved in what was described as a “co-ordinated action”. They were joined by the Bank of Canada and the Bank of Japan.
“The network of swap lines among these central banks is a set of available standing facilities and serve as an important liquidity backstop to ease strains in global funding markets, thereby helping to mitigate the effects of such strains on the supply of credit to households and businesses,” the central banks said in a statement.
The move came hours after the SNB announced that its two largest banks, UBS and Credit Suisse (SIX:CSGN), would merge after a frantic weekend of negotiations brokered by Swiss regulators to safeguard its banking system and attempt to prevent a crisis spreading across global financial markets.
FTSE set to open sharply lower
FTSE 100 is expected to nurse heavy losses at the open on Monday after Asian bank debt and shares fell after the wipeout of US$17bn of Credit Suisse bonds in the takeover by UBS sparking concern of further turmoil in in European markets.
HSBC shares dropped 7.1% in Hong Kong, while Standard Chartered tumbled 7.7% while some bank bonds suffered steep declines.
Spread betting companies are calling London’s lead index down by around 100 points.
The baning sector will once again take centre stage following more drama over the weekend after UBS agreed to buy Credit Suisse in a US$3.2bn deal.
The two largest banks in Switzerland agreed the deal after a frantic weekend of talks brokered by Swiss regulators to safeguard its banking system and attempt to prevent a crisis spreading across global financial markets.
Under the terms of the deal shareholders of Credit Suisse will receive 1 share in UBS for every 22.48 shares in Credit Suisse.
Some SFr16bn of Credit Suisse’s Additional Tier 1 capital bonds, which are designed to take losses when institutions run into trouble and to transfer the risk of a bank failure from taxpayers to investors, are being wiped out.
Michael Hewson, chief market analyst at CMC Markets, said: "Some have suggested that UBS putting such a low-ball number on its interest means that Credit Suisse could be in more trouble than perhaps regulators are letting on, and while that might be true, it could also be UBS management being extremely cautious."
Until the agreement is finalised the Swiss National Bank will grant Credit Suisse access to facilities that provide substantial additional liquidity.
The historic deal follows five days in which the Swiss establishment raced to end a deepening crisis at Credit Suisse that threatened to topple the country’s second-largest lender.
An emergency SFr50bn (US$54bn) credit line provided by the Swiss National Bank on Wednesday failed to arrest a steep decline in the share price, which was exacerbated by wider market turmoil caused by the sudden collapse of California-based Silicon Valley Bank.
“On Friday the liquidity outflows and market volatility showed it was no longer possible to restore market confidence, and a swift and stabilising solution was absolutely necessary,” Swiss president Alain Berset said at a press conference in Bern on Sunday evening. “This solution was the takeover of Credit Suisse by UBS.”
“This is no bailout. This is a commercial solution,” said Swiss finance minister Karin Keller-Sutter.
“The bankruptcy would have had huge collateral damage on the Swiss financial market and with a risk of contagion internationally.
“The US and UK were very grateful for this solution . . . they really feared a bankruptcy of Credit Suisse,” she added.
Axel Lehmann, Chairman of Credit Suisse said: "Given recent extraordinary and unprecedented circumstances, the announced merger represents the best available outcome.”
The merger is expected to be consummated by end of 2023 if possible.
In Asia on Monday, the Nikkei 225 index was down 1.4%. In China, the Shanghai Composite was down 0.4%, while the Hang Seng index in Hong Kong was down 3.2%.
No major UK corporate results are scheduled on Monday.