UK banking stocks recovered their poise last night after another rollercoaster day on the stock market as investors responded to the emergency takeover of Credit Suisse.

UBS Group agreed to take over its Swiss counterpart in an all-share merger worth £2.65 billion on Sunday, following intervention by the country’s government, regulators and national bank, as concerns mounted over the strength of Credit Suisse.

Attention had focused on Credit Suisse after the collapse of US banks Silicon Valley Bank, Silvergate and Signature Bank, which sparked fears of contagion across the global banking sector.

Shares in the Swiss bank collapsed after it reported last Tuesday “material weaknesses” in its financial reporting, and the stock lost further ground on Friday despite rallying briefly following the injection of a £44bn loan from the Swiss central bank to boost its liquidity on Wednesday.

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The sell-off in banking stocks, however, has been widespread, and the FTSE ended last week at its lowest point since Russia invaded Ukraine last year. Shares in US giant First Republic have continued to fall despite a $30 billion rescue package put together by a group of America’s biggest banks last week.

It was hoped that the UBS takeover of Credit Suisse would settle nerves on global financial markets yesterday morning.

However, shares in major UK-listed banks such as NatWest Group owner Royal Bank of Scotland, Lloyds Banking Group and Barclays opened sharply lower yesterday, before regaining ground as the session progressed.Analysts attributed the negative sentiment yesterday morning to the ruling by FINMA, the Swiss financial market regulator, to wipe out around $17 billion (£14bn) of riskier Credit Suisse bonds as part of the bank’s rescue by UBS.

FINMA determined that Credit Suisse’s additional tier 1 capital, deriving from the issuance of tier 1 capital notes, will be written off to zero.

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Russ Mould, investment director at stockbroker AJ Bell, said: “Everything is moving so quickly in the banking sector that as soon as you think the main issue is sorted, along comes another worry. The takeover of Credit Suisse by UBS was done fast and should have provided reassurance to the market that we haven’t had another bank collapse. However, what it has done is exposed the issues around AT1 bonds, also known as additional tier-one bonds.”

Mr Mould noted: “AT1 bonds are a form of contingent convertibles. They can be converted into equity or written down entirely if certain conditions are met, with the decision triggered by capital strength falling below a pre-determined level – i.e., when the issuer gets into trouble. These bonds typically offer high yields to reflect the additional risks.

“The Swiss financial regulator has ordered that Credit Suisse’s AT1 bonds be written down to zero.

“That appears to have spooked investors and has led to a sell-off in other bank debt and that’s weighed on share prices. It means the banking crisis we’ve seen over the past few weeks has started a new chapter rather than reaching its ending.”

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Analysts at Shore Capital noted that confusion had been created because equity holders are usually wiped out before bondholders. “That would be the normal course of events,” the analysts said. “However, AT1 bonds are a different kind of instrument. These are bonds that are designed to be written off or converted to equity in order to bolster a bank’s capital position prior to it defaulting. Normally this happens when the core tier 1 ratio drops below a certain level, because of losses that have been generated by the bank.

“In this situation, it is hard for us to gauge what those losses may or may not have been because Credit Suisse has effectively been taken out before it has had chance to realise said losses in the normal course of business. However, we would assume the reason the write-down has been triggered is because without the takeover the regulator believes such losses would have ultimately been incurred.”

Susannah Streeter at Hargreaves Lansdown said yesterday morning: “Investors in Asia initially welcomed the action, but fresh worries are now coming to the surface about what could happen next. 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, as under the deal those additional tier 1 bonds were valued at zero. In bankruptcy proceedings, bond holders are higher up the queue than shareholders, but under the contracts signed the same rules don’t have to apply given Credit Suisse was facing a clear viability issue and had already been given support from the central bank.”

The move by Swiss regulators to effectively put shareholders ahead of bondholders prompted regulators and central banks to issue statements to clarify creditor hierarchy in the event of insolvency.

The Bank of England joined the ECB Banking Supervision, the Single Resolution Board, and the European Banking Authority in reassuring markets that common equity instruments, such as shares, are the first ones to absorb losses, after which AT1 bonds would be required to be written down.

Shares in NatWest closed down just 0.2p at 257.8p and Lloyds ended 0.15p down at 46.11p. Barclays closed down3.2p at 136.36p.

The FTSE 100 up 68.45 points at 7,403.85.