US banking stocks mostly rose on Monday and Europe's lenders recovered from a sharp early sell-off after UBS Group's state-backed takeover of Credit Suisse appeared to close off one source of worry for the global banking sector.
In a package engineered by Swiss regulators on Sunday, UBS Group AG will pay 3 billion Swiss francs ($3.2 billion) for 167-year-old Credit Suisse Group AG, which was once worth more than $90 billion.
Bonds issued by major European banks fell after some Credit Suisse bondholders were wiped out in the deal, but UBS shares were 2% higher, bouncing from a 16% slump triggered by concerns about the long-term benefits of the deal and the outlook for Switzerland, once considered a paragon of sound banking.
In the United States, worries remain despite several large banks depositing $30 billion last week into First Republic Bank, the US lender drawing the most concern from investors.
First Republic shares tumbled as much as 50% and were last down about 30%.
JPMorgan Chase & Co CEO Jamie Dimon is leading talks with the chiefs of other big banks about fresh efforts to stabilize the ailing mid-size lender, the Wall Street Journal reported on Monday, citing people familiar with the matter.
The banks are considering an investment into First Republic, the report said.
The Federal Reserve's relentless rate hikes to quash inflation were seen as a trigger for the collapse of US mid-sized lenders Silicon Valley Bank and Signature Bank last month, and traders have now increased their bets that the central bank will pause its hiking cycle on Wednesday to try to ensure financial stability.
European bank shares climbed into positive territory while shares in US financial giants Citigroup and JPMorgan Chase also rose.
Other regional US lenders were also up. PacWest Bankcorp jumped 8.5% after saying deposit outflows had stabilised and its available cash exceeded total uninsured deposits.
"There (is) more good news than bad news on the banking front," said Art Hogan, chief market strategist at B Riley Wealth. "First and foremost, the Credit Suisse, UBS merger certainly takes a lot of stress out of the global banking system."
Policymakers from Washington to Europe have asserted that the current turmoil is different than the global financial crisis 15 years ago as banks are better capitalised and funds more easily available.
Hogan said a deal on Sunday for a unit of New York Community Bancorp to buy deposits and loans from the failed Signature Bank also boosted sentiment in US banks. New York Community Bancorp shares surged 36% at the Wall Street open.
Investor focus in Europe shifted to the massive blow some Credit Suisse bondholders will take, prompting euro zone and UK banking supervisors to try to stop a rout in the market for convertible bank bonds.
The regulators said owners of this type of debt would only suffer losses after shareholders have been wiped out - unlike at Credit Suisse, whose main regulators are in Switzerland.
To prevent the banking jitters from snowballing into a bigger crisis, top central banks promised over the weekend to provide dollar liquidity to stabilise the financial system.
In a global response not seen since the height of the pandemic, the US Federal Reserve said it had joined central banks in Canada, Britain, Japan, the euro zone and Switzerland in a co-ordinated action to enhance market liquidity.
The shotgun Swiss banking marriage is backed by a massive government guarantee, helping prevent what would have been one of the largest banking collapses since the fall of Lehman Brothers in 2008.
However, the Swiss regulator decided Credit Suisse's additional tier-1 (AT1) bonds with a notional value of $17 billion will be valued at zero, angering some holders of the debt who thought they would be better protected than shareholders.
AT1 bonds - a $275 billion sector also known as "contingent convertibles" or "CoCo" bonds - can be converted into equity or written off if a bank’s capital level falls below a certain threshold.
The deal will also make UBS Switzerland’s only global bank and the Swiss economy more dependent on a single lender.
One man who walked out of Credit Suisse's London office on Monday told Reuters that the atmosphere inside the building was "business as usual".
"When you work in banking, these things happen, and there’s no point worrying," he said, refusing to give any further details."
Other staff in Hong Kong and Singapore fretted about retrenchments and retaining business.
Switzerland's two biggest political parties sharply criticised the takeover, saying huge state support - which could add up to $280 billion - created enormous risks for the country.
"What has happened is terrible for the credibility of Switzerland," said Roger Nordmann, leader of the Social Democrats in the Swiss parliament.
"It's a warning shot for Switzerland about having banks which are just too big."