British banks were not left behind in the ongoing UBS-Credit Suisse drama. Lloyds (LON: LLOY) share price tanked by over 2.7% on Monday while Barclays dropped by 6.7%. Other banking stocks like NatWest, Standard Chartered, HSBC, and Virgin Money all slipped by more than 2% on Monday. This drop was a continuation of the decline we have seen in the past few days.
Lloyds, Barclays, NatWest, HSBC share prices
UBS share price slips
The main reason for the crash of British banks was the weekend drama about Credit Suisse, the second-biggest bank in Switzerland. Swiss regulators decided to engineer the biggest bank buyout in more than a decade.
They decided to push UBS to acquire Credit Suisse in a $3.3 billion deal, as we wrote here. The regulators believed that the measure was an appropriate one considering that the bank was losing more than $10 billion a day in outflows.
As such, failure for UBS to acquire the company would have forced the regulators to shut the bank down, sending shockwaves to the financial sector. It would have been the biggest bank failure since Lehman Brothers collapsed during the Global Financial Crisis (GFC) in 2009.
The collapse of Credit Suisse has pushed more investors to sell their bank investments fearing that contagion will spread. At risk is the safety of bank bonds that these investors have in their books.
UK banks seem to be safe
Still, some analysts believe that British banks like Lloyds, Barclays, and NatWest are a bit safe from the ongoing rout. For one, the banks that have collapsed recently had major internal structural challenges that UK banks don’t have.
For example, in the United States, Silicon Valley Bank collapsed because of its high investments in long-dated government bonds. Further, Signature Bank and Silvergate Capital fell because of their focus on cryptocurrencies.
Meanwhile, Credit Suisse was affected by various scandals such as the collapse of Archegos Capital Management and Greensill. The company was also hit for funding a corrupt project in Mozambique.
Therefore, UK banks like Lloyds and NatWest seem safe because of their little exposure in investment banking. They have also not made risky investments that Credit Suisse made. Their biggest risk, in my view, is their exposure to the UK’s pension sector. As we saw during the mini-budget crisis, these banks has some access to these products. The Bank of England (BoE) had to intervene to stop a doom loop in the gilt market. These risks remain there, which could have an impact on UK bank stops.
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