Banking shares fell in London and across Europe on Monday after the emergency rescue of Credit Suisse by rival Swiss bank UBS failed to calm markets.
In the UK, the FTSE 100 was down 1.5% or more than 110 points, dragged down by London-listed banks. Natwest, Barclays and Standard Chartered were all down more than 7%, while HSBC and Lloyds also fell about 5% in early trading.
European banking shares as measured by the Stoxx Europe 600 Banks Index was down 4% on Monday morning, with all major indices lower.
Credit Suisse shares plunged 63% while UBS was down 12%.
The fresh jitters were partly prompted by the terms of the rescue deal, which saw holders of $17bn (£14bn) of Credit Suisse’s bonds – Additional-Tier 1s (AT1) – wiped out, while equity investors were not as badly affected.
Neil Wilson, chief market analyst at Markets.com, commented: “Blatantly upending the hierarchy of debt will have ramifications and I think this is why we are seeing such a negative reaction in bank shares this morning.”
That decision, by the Swiss regulator, has spooked investors over concerns of a potential slump in the value of AT1 bonds at other institutions.
“The UBS acquisition of Credit Suisse over the weekend is not giving enough of a respite to market sentiment this morning, with stress now shifting to the AT1 bond market,” said Francesco Pesole, a foreign-exchange strategist at ING in London.
Central banks took coordinated action on Sunday night to try to shore up confidence by agreeing measures to ensure banks in Canada, Britain, Japan, Switzerland and the eurozone would have the dollars needed to operate.
The US Federal Reserve, the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank announced they would boost liquidity through daily US dollar swaps.
The change is a modest expansion of an existing programme in which the Fed each week pays dollars to other central banks in exchange for local currency.
Earlier on Monday, shares in banking giants HSBC and Standard Chartered tumbled in the Asian stock market as details of UBS’s $3.2bn (£2.65bn) “emergency takeover” of Credit Suisse rattled global investors.
The two banking giants, which are headquartered in London but make a significant proportion of their income in Asia, fell by 7% and 5%, respectively in Hong Kong trading. Bank of East Asia fell 3.5%. Hong Kong’s Hang Seng Index was down 2.6%.
“Investors in Asia initially welcomed the action, but fresh worries are now coming to the surface about what could happen next,” said Susannah Streeter, head of money and markets at Hargreaves Lansdown.
“Focus is shifting to the implications of high-risk bond holders in banks, after holders of more risky Credit Suisse debt saw their investment wiped out. It is not yet known exactly where more pain will emerge in the banking sector, but investors fear the problems are not yet over.”