By Stefania Spezzati and Elisa Martinuzzi

LONDON (Reuters) – At least two major banks in Europe are examining scenarios of contagion in the region’s banking sector and are looking to the Federal Reserve and the ECB for stronger signals of support, two senior executives close to the discussions told Reuters.

The fallout from the crisis of confidence in Credit Suisse Group AG and the failure of two U.S. banks could ripple through the financial system next week, the two executives separately told Reuters on Sunday.

The two banks have held their own internal deliberations on how soon the European Central Bank should weigh in to highlight banks’ resilience, specifically their capital and liquidity positions, the people said.

A focus of these internal discussions is whether such statements might create even more alarm if they are made too soon, the people said.

The executives said their banks and the sector are well capitalised and their liquidity is strong, but they fear the crisis of confidence will sweep up more lenders.

One of the executives said the Federal Reserve might have to move first as the failures of Silicon Valley Bank and Signature Bank in the United States earlier this month triggered the concerns in Europe.

A third executive at another major European bank separately told Reuters they thought the ECB would be reluctant to make a public statement before markets reopen, questioning whether they would judge it necessary at this time and adding that the main focus was still on talks in Switzerland. The ECB declined to comment. The Fed had no comment.

UBS is close to finalizing a deal to buy its rival Credit Suisse, a source familiar with the matter told Reuters on Sunday. The deal is valued at more than $2 billion after UBS increased its offer, the Financial Times earlier reported, with a news conference expected later on Sunday.

A further selloff in banks could erode confidence depositors have in their lenders. Since the U.S. banks’ collapse, savers have been moving funds to bigger lenders in a flight to safety that undermines the sector’s ability to lend.

Former Goldman Sachs CEO Lloyd Blankfein said on Sunday the banking crisis in the United States was going to expedite overall credit tightening and slow the U.S. economy.

In Europe, companies still rely mostly on bank loans to fund their growth, meaning the real economy is more sensitive to banks.

The ECB on Thursday stuck with plans for a half-point rate rise to contain inflation. But it stressed it was monitoring market tensions and would respond as necessary to preserve price stability and financial stability in the currency bloc.

FINANCIAL SYSTEM 

As one of 30 global systemically important banks, Credit Suisse’s problems could affect the entire financial system, industry executives have said.

U.S. and European banking stocks have slid 22% and 17% respectively so far in March, putting them on track for their biggest monthly drops since March 2020 when the COVID-19 crisis rattled markets.

As regulators try to stop the loss of confidence in Credit Suisse before markets reopen on Monday, one source said earlier on Sunday that the talks with UBS were encountering significant obstacles, and 10,000 jobs may have to be cut if the two banks combine, Reuters reported.

The Swiss lender last week became the first global bank to receive an emergency liquidity line since the financial crisis.

In a sign of further strain, a coalition of midsize U.S. banks, Mid-Size Bank Coalition of America (MBCA), has asked regulators to extend FDIC insurance to all deposits for the next two years, Bloomberg News reported on Saturday citing an MBCA letter to regulators.

The letter said that extending insurance will stop the exodus of deposits from smaller banks, in turn helping to stabilise the banking sector, the report said. 

The U.S., UK and Swiss central banks all hold scheduled meetings this week.

Despite still-high inflation, the banking turmoil has forced traders to rapidly re-price expectations for further rate hikes as overly high interest rates can cause a fall in demand for new loans, damaging banks’ profits.

    Markets price in just a 60% chance of a quarter-point rate hike at the Fed’s meeting this week, a sharp turnaround from expectations for a bigger half-point move earlier this month.

(Additional reporting by Balazs Koranyi, Dan Burns and Iain Withers; Writing by Dhara Ranasinghe; Editing by Paritosh Bansal, Barbara Lewis and David Holmes)

(Reuters) -UBS has agreed to buy Credit Suisse after increasing its offer to more than $2 billion, the Financial Times reported on Sunday.

UBS will pay more than 0.50 francs ($0.5401) a share in its own stock, far below Credit Suisse’s closing price of 1.86 francs on Friday, FT reported, citing sources.

The Swiss National Bank has agreed to offer a $100 billion liquidity line to Credit Suisse as part of the deal, the FT added, citing two people familiar with the matter.

According to the report, UBS has agreed to a softening of a material adverse change clause that would void the deal if its credit default spreads jump.

Credit Suisse and UBS declined to comment.

($1 = 0.9258 Swiss francs)

(Reporting by Shubham Kalia in BengaluruEditing by Frances Kerry and Barbara Lewis)

By David Lawder

WASHINGTON (Reuters) -Four prominent U.S. lawmakers on banking matters said on Sunday they would consider whether a higher federal insurance limit on bank deposits was needed to stem a financial crisis marked by a drain of large, uninsured deposits away from smaller and regional banks.

“I think that lifting the FDIC insurance cap is a good move,” Senator Elizabeth Warren, a Democrat, said on CBS’s “Face The Nation” program, referring to the Federal Deposit Insurance Corporation’s current $250,000 limit per depositor.

Asked what the new, higher level should be, Warren, a member of the Senate Banking Committee, said: “This is a question we’ve got to work through. Is it $2 million, is it $5 million? Is it $10 million? Small businesses need to be able to count on getting their money to make payroll, to pay the utility bills.”

Warren declined to discuss conversations she has held with the Biden administration about such a move, but said an insurance limit hike “is one of the options that’s got to be on the table right now.”

Senator Mike Rounds, a Republican on the Senate Banking Committee, also questioned whether the $250,000 limit, which was increased from $100,000 during the 2008 financial crisis, was still appropriate.

“Perhaps that’s not enough,” Rounds told NBC’s “Meet the Press.”

He added that regional and smaller banks would want some “reassurances” that they can compete with larger banks and “it’s going to take a couple of months for consumers outside to recognize that all these banks are stable.”

Republican Representative Patrick McHenry, chairman of the House Financial Services Committee, said he would work to address the adequacy of FDIC deposit insurance, but added that he has not had any conversations with Biden administration officials on raising the limit.

“What I will do though, legislatively, and in an oversight function, is to determine whether or not we need to address the FDIC deposit level,” McHenry told the same CBS program.

During the financial crisis that erupted in 2008, the FDIC temporarily backstopped all deposits to safeguard smaller banks.

Pressure on midsized and smaller banks from deposit outflows continued on Friday despite a move by several large banks to deposit $30 billion into First Republic Bank, an institution rocked by the failure of Silicon Valley Bank and Signature Bank.

Some former officials, including former FDIC chief Sheila Bair, have said regulators may need to repeat a temporary blanket guarantee on all U.S. deposits. Under the Dodd-Frank financial reform law, such a move requires Congress to pass a resolution of approval on an expedited schedule.

McHenry said he wanted to examine the trade-offs of higher deposit insurance limits, “the moral hazard of having more risk taking in the financial sector, and also the impact it would have on community banks.”

A U.S. Treasury spokesperson declined comment. Treasury Secretary Janet Yellen told Senators last week that further guarantees of uninsured bank deposits beyond those in SVB and Signature Bank would require systemic risk determinations by her, President Joe Biden and “supermajorities” of the Federal Reserve and FDIC boards.

Senator Chris Van Hollen, a Democrat on the Senate Finance Committee, also told Fox News Sunday that Congress and regulators need to address the $250,000 limit, but not every bank should be “bailed out.”

“There will be a question going forward as to how we deal with deposits over $250,000 as being covered here. But what the mechanism would be if we do that at all, is something very much up to debate,” Van Hollen said.

(Reporting by David Lawder in WashingtonEditing by Nick Zieminski and Matthew Lewis)

(Reuters) -British retailer John Lewis, which has been 100% owned by its staff, is considering diluting its partnership structure, The Sunday Times reported on Saturday.

The report said that the company would consider selling only a minority stake and its priority would be to maintain majority employee ownership.

Chairperson Sharon White is in the early stages of exploring a plan to change the retailer’s mutual structure so it can try to raise between 1 billion and 2 billion pounds ($1.22 billion-$2.44 billion) of new investment, the report said.

Any outside investor would have to share the partnership’s employee-centric values, the report added.

The company, which runs John Lewis department stores and grocer Waitrose, said on Friday it would have to cut staff numbers and scrap bonuses this year, flagging an uncertain outlook as customers struggle with inflation.

“We’ve always said we would seek partnerships to help fund our transformation and exciting growth plans,” John Lewis said in a statement at the weekend, citing previous partnerships with Ocado in the past and a current joint venture with investment firm abrdn.

“Our Partners, who own the business, will be the first to hear about any developments.”

($1 = 0.8214 pounds)

(Reporting by Urvi Dugar in Bengaluru and Alistair Smouth in LondonEditing by Peter Graff and Frances Kerry)

By John O’Donnell and Chiara Elisei

FRANKFURT/LONDON (Reuters) – Swiss authorities are examining imposing losses on Credit Suisse bondholders as part of a rescue of the bank, two sources with knowledge of the matter said on Sunday.

However, European regulators are apprehensive about such a move for fear that it could hit investor confidence elsewhere in Europe’s financial sector, the sources said, speaking on the condition of anonymity.

A final decision, however, had not been taken and the terms could still change, according to the sources.

Losses on bondholders may need to be larger if Credit Suisse were wound down rather than if it were taken over by UBS, one of the sources said. Authorities are trying to engineer a UBS takeover of Credit Suisse before financial markets reopen on Monday.

FINMA, the Swiss regulator, did not immediately respond to a request for comment. Credit Suisse and UBS declined to comment.

Despite the prospect of losses, some bond investors on Sunday were encouraged by a report in the Financial Times that UBS had offered up to $1 billion to buy its rival, although there is no guarantee a deal with UBS will be reached.

The price of one of Credit Suisse’s Additional Tier 1 (AT1) bonds, a junior tranche of debt which slumped in price this week, rallied in limited trading after the report, one investor said.

A $1 billion deal would mean Credit Suisse shareholders getting a fraction of what their shares were worth on Friday.

But with bonds sitting above equity in the priority ladder for repayment in a bankruptcy process, two investors said it would be unlikely bondholders would take a hit if shareholders get something.

“I would be surprised if Credit Suisse bondholders, including AT1 investors, weren’t made whole. As long as UBS pays something to equity investors, bondholders should be left untouched,” Jerome Legras, head of research at Axiom Alternative Investments, an investor in Credit Suisse’s AT1 debt, told Reuters.

AT1 bonds are designed to turn into equity if a bank’s capital is depleted to help prop up the bank.

Another holder of the debt said they expected the AT1 bonds could be converted into UBS shares if a deal went through.

Credit Suisse bonds plunged into distressed territory at or below 30 cents on the dollar this week as investors worried about the health of the bank even after the Swiss National Bank provided the lender with a $54 billion emergency loan.

Protecting bondholders from losses would boost confidence across the financial industry, but a deal with UBS is just one potential outcome. If the takeover falls apart, Switzerland is considering taking over the bank in full or holding a significant equity stake, Bloomberg reported.

(Reporting by John O’Donnell and Chiara Elisei; Additional reporting by Elisa Martinuzzi and Pablo Mayo Cerqueiro; Writing by Tommy Reggiori Wilkes; Editing by Paritosh Bansal and Hugh Lawson)

PRAGUE (Reuters) – Czech carmaker Skoda would have to cut 3,000 jobs and axe some models if the European Union’s “Euro 7” emissions scheme is implemented in its current form, a Skoda board member warned in a TV debate on Sunday.

The proposed Euro 7 law, which EU countries and lawmakers will start negotiating this year, would tighten limits on the emission by cars of health-harming pollutants, including nitrogen oxides.

The EU has said the health benefits of the measure would far outweigh the costs, but some car makers have warned it would impose unfeasibly expensive development costs. Daimler Trucks chief Martin Daum for instance said on March 10 it would cost the industry “billions”.

“If (Euro 7) is approved in this shape, it would mean for Skoda Auto to close one plant, because we would stop producing the smaller models – Fabia, Scala, Kamiq – that means 3,000 jobs (would be) hit at least,” Martin Jahn, a board member of Skoda, which is part of Volkswagen, said in a televised debate.

Overall, more than 10,000 jobs would be at risk in the Czech Republic, including at Skoda’s suppliers, Jahn said.

The three smaller models represented nearly a third of Skoda’s deliveries to customers in 2022.

Transport ministers from the Czech Republic, Germany, Italy, Poland, Portugal, Romania, Hungary and Slovakia met on Monday to discuss their efforts to change the Euro 7 proposal.

(Reporting by Robert Muller; Editing by David Holmes)

By Kanishka Singh and Rishabh Jaiswal

WASHINGTON (Reuters) -U.S. Senator Elizabeth Warren on Sunday called for an independent probe into the recent failures of Silicon Valley Bank and Signature Bank and took specific aim at the head of the Federal Reserve Bank of San Francisco responsible for oversight of SVB.

Democrat Warren, who is pushing for tighter banking regulations, sent a letter to the inspectors general of the U.S. Treasury Department, the Federal Deposit Insurance Corp (FDIC) and the Federal Reserve on Sunday, urging regulators to examine the recent management and oversight of the banks which collapsed earlier this month.

California regulators shuttered Silicon Valley Bank on March 10 and appointed FDIC as receiver. It was the largest U.S. bank collapse since Washington Mutual went bust during the financial crisis of 2008. On Friday, the bank’s parent, SVB Financial Group, said it filed for Chapter 11 bankruptcy protection.

U.S. prosecutors are investigating the SVB collapse, a source familiar with the matter told Reuters last week.

Warren also said on Sunday she does not have faith in San Francisco Federal Reserve President Mary Daly in the wake of SVB’s collapse.

“No, I do not,” Warren said on CBS’s “Face the Nation” when asked if she has faith in Daly.

Financial stocks lost billions of dollars in value since Silicon Valley Bank and Signature Bank collapsed this month. President Joe Biden said on Friday the banking crisis has calmed down. He also promised Americans that their deposits are safe.

The inspectors general for the Treasury, Fed, and FDIC should deliver a preliminary report to Congress in 30 days, Warren said in her letter.

“The bank’s executives, who took unnecessary risks or failed to hedge against entirely foreseeable threats, must be held accountable for these failures. But this mismanagement was allowed to occur because of a series of failures by lawmakers and regulators,” she wrote in the letter.

She also criticized Federal Reserve Chair Jerome Powell in her CBS interview.

“Remember the Federal Reserve Bank and Jerome Powell are ultimately responsible for the oversight and supervision of these banks. And they have made clear that they think their job is to lighten regulations on these banks. We’ve now seen the consequences,” Warren said.

(Reporting by Kanishka Singh in Washington and Rishabh Jaiswal in BengaluruEditing by Frances Kerry and Matthew Lewis)

By Lewis Krauskopf and David Randall

NEW YORK (Reuters) -Whipsawed U.S. stocks have gained an unexpected ally in recent days – a historic plunge in bond yields.

U.S. government bond yields fell steeply this week, with some durations marking their biggest drops in decades, as investors bet the Federal Reserve would likely curb its aggressive rate hike trajectory to avoid exacerbating financial system stress following the failures of Silicon Valley Bank and Signature Bank.

The volatility in fixed income markets has unsettled investors, and falling yields can reflect expectations that the Fed will cut rates because of a hit to growth.

At the same time, the drop in yields has so far been a boon for equities, especially tech and other large growth stocks whose relatively strong performance helped support the benchmark S&P 500 . The index finished up 1.4% for the week, with strength in technology stocks outweighing sharp declines in bank shares.

While the banking crisis has stirred recession fears, “it’s the interest rate move that’s a … tailwind for stocks right now,” said Charlie McElligott, managing director of cross-asset macro strategy at Nomura.

The near-term trajectory of yields will likely hinge on next week’s Federal Reserve meeting. Signs that the central bank may prioritize financial stability and slow or pause its rate increases could pull yields even lower. Conversely, yields could rebound if the Fed signals that bringing down inflation – which remains high despite a barrage of rate increases – will continue to be job one.

“The market is not quite sure how the Fed is going to look at this,” said Garrett Melson, portfolio strategist at Natixis Investment Managers Solutions.

For now, futures markets indicate that investors are assigning a 60% probability of a 25 basis point rate increase at the Fed’s March 21-22 meeting, with rate cuts to follow later in the year – a sharp turnaround from the hawkish expectations that prevailed earlier this month.

“For the first time during this Fed tightening cycle, the Fed now has to balance its inflation-fighting credibility with financial market stability,” said Michael Arone, chief investment strategist at State Street Global Advisors.

Treasury yields fell to historic lows after the Fed cut rates to support the economy at the beginning of the COVID-19 pandemic, fueling a stock market rally that saw the S&P 500 double from its March 2020 trough at one point.

As the Fed began tightening monetary policy a year ago to fight inflation, Treasury yields began to rise, offering investors an increasingly attractive alternative to equities. Two-year yields, which recently stood at 3.85%, hit an over 15-year high of 5.08% earlier this month.

The recent drop in rates has helped stocks regain their appeal, according to some metrics. The equity risk premium, or the extra return investors expect to receive for holding stocks over risk-free government bonds, has rebounded to where it stood in early January but still remains near its lowest level in over a decade, according to Refinitiv data.

Other metrics show stocks remain expensive by historical standards. The S&P 500 trades at 17.5 times forward earnings estimates compared to its historic average P/E of 15.6 times, according to Refinitiv Datastream.

The rally in interest-rate sensitive areas such as tech stocks appears to signal that the market expects rates to continue to fall as a widely feared recession nears, Nomura’s McElligott said.

The S&P 500 information technology sector and communication services sector rose over 5% and nearly 7%, respectively, for the week, buoyed by strong gains in megacap stocks Microsoft Corp and Google parent Alphabet Inc.

Some investors, however, are skeptical of stock valuations. Bob Kalman, senior portfolio manager at Miramar Capital, said the Nasdaq 100 should trade at no more than 25 times forward earnings given current interest rates, below its current 27.3.

“People have this muscle memory to buy mega-cap tech whenever they get nervous,” Kalman said. “But the Fed hasn’t backed off its rhetoric that they know they must overshoot because inflation is a much larger concern in the economy than a couple of bank failures.”

(Reporting by Lewis Krauskopf and David Randall; Editing by Ira Iosebashvili and Richard Chang)

(Reuters) – Credit Suisse’s plan to spin off its investment bank under the First Boston brand are being thrown into doubt by takeover talks, Bloomberg News reported on Sunday.

UBS is showing little appetite for Credit Suisse’s investment banking business as part of a government-orchestrated takeover, the report said, adding that plans to separate and eventually list that business are in doubt.

UBS and Credit Suisse did not immediately respond to Reuters requests for comment.

(Reporting by Akriti Sharma in Bengaluru; Editing by David Goodman)