The banking authorities of the Eurozone assure that the shares are always reset first, only then the losses are covered by bonds supplementing solvency, which became the hot potato of Credit Suisse’s rescue package.
of the euro area The banking authorities, i.e. the European Central Bank’s banking supervision, the bank resolution authority SRB and the banking authority EBA sent a concise statement on Monday afternoon, which was intended to calm nervous financial markets.
The market for bank stocks and certain bank bonds was very volatile on Monday as a result of the bank bailout decided in Switzerland over the weekend. Over the weekend, the Swiss banking supervisory authorities decided to sell the Credit Suisse bank, which had run into serious difficulties, to the UBS bank.
As a result of the sale, Credit Suisse’s shareholders will receive approximately three billion euros from the bank as a purchase price. At the same time, however, the so-called AT-1 bonds, which are included in the capital covering the bank’s losses, will be completely annulled.
General the perception in the market has been that the bonds in question are in a better position than the bank’s share capital. It means that the bank’s losses would be covered by these bonds only after the shareholders’ ownership has been completely reset. Now the Swiss authorities rejected the principle.
In the bulletin of the banking authorities of the euro area, the Swiss banking authorities are thanked for their actions to calm the financial markets.
What is striking is that right after the authorities say that they would not act in a bank rescue situation in any case the same way as the Swiss.
Authorities reiterate that one established part of the bank resolution system set up after the 2008 financial crisis is the order in which the shareholders and creditors of a troubled bank should bear losses.
“Share capital instruments are the first to bear losses and only when they have been fully used would AT-1’s [additional tier 1] recording down. This approach has been consistently applied in previous cases and will guide the actions of the SRB and the ECB’s banking supervision in dealing with crises,” the release reads.
The banking authorities of the eurozone therefore stress that the eurozone would never deliver in the same way as it has been done in Switzerland, but that the shares would always be recorded at zero first.
The authorities also remind that the rules have been drawn up according to the guidelines of the Financial Stability Board, which guides international banking regulation. So they should apply everywhere in Western countries. This is also natural, as the financial market is completely international.
In the euro area AT-1 instruments have been written down at least once before, i.e. in 2017, when Banco Popular Español was saved by merging it with Santander bank. Then the value of the shares was also reset.
AT-1 type bonds were introduced after the banking crisis so that in the event of bank failure, the losses could be fully covered by investors’ funds, and the states would no longer have to bail out the banks. There has been enough market for these bonds because they have offered a reasonably good return as a counterweight to the risk.
“AT-1 is and will be an important part of the capital structure of European banks,” the banking authorities’ announcement reads.
Credit Suisse and its subsidiaries have sold approximately EUR 16 billion worth of AT-1 bonds to investors.
Credit Suisse has been in bad financial shape for a long time. Therefore, it has had to pay a significantly higher interest rate on AT-1 bonds than many competitors.
Last summer, the bank promised to pay 9.75 percent interest on the AT-1 bonds it issued. Such a high interest rate signals to investors that there is also considerable risk associated with the investment.
For example, in August 2021, Nordea issued one billion euros of AT-1 bonds with an interest rate of only 3.75 percent.
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