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A fatal decision by the Swiss authorities to impose full losses on certain bonds of the impaired creditor Suisse will make life more difficult for starting European banks, the former CEO of the institute has warned.
In a column published in Thursday’s Financial Times, Tidjane Thiam argues the distressed sale to cross-town rival UBS has supplied an international hierarchy of financial institutions, in which stockholders such as the Saudi National Bank are always the first to lose their coats when a company goes bust.
Rather, all the supply of investors who bought $17 billion in the form of Additional Tier 1 bonds to take the bath, argued Ivorian, who CEO from 2015 to February 2020. This model could prove valuable to creditors on the continent. pushing them further at their own expense.
“It is a fundamental principle that common equity takes the first blow,” he wrote, among reports that the victims of servitude consider legal action.
“It seems that the handling of the AT1s, even if they run right under Swiss rules, will raise the cost of capital for Swiss banks and European banks. This will have some of their U.S. counterparts rubbing their hands,” added Thiam.
The market is already pricing in higher capital costs for European banks
Most of Credit Suisse’s equity assets are at 3 billion Swiss francs ($3.3 billion). While the conditions will impose heavy losses on shareholders – with the troubled stock still losing two-thirds overnight – investors like the Saudi National Bank, which pumped in 1.5 billion francs last year, have not lost everything.
In the institutions of the banking heerarchy suspending the payment, the servants will probably pay in the investment a greater return before signing the next question AT1, according to Thiam.
“This new layer of uncertainty will have an adverse impact on the competitiveness of the European sector. On the net, the US and Asian rivals are relatively stronger than all of them.
Indeed, investors have already priced in this added risk, with shares in German lender Deutsche Bank selling steeply on Friday. Other European banks such as UBS, Société Générale and UniCredit were also hit, albeit to a lesser degree.
DB, Barclays, SG under cds diff. Now more than March 15th. Heard of the party due to the closing of the counterparty and weakness in the bonds, but the movement is really strong. pic.twitter.com/YKDjD93nAj
— boaz weinstein (@boazweinstein) March 23, 2023
The cost of credit default swaps, a financial instrument that effectively protects investors against a company’s insolvency, had also soared. This can be seen in particular for “subordinated” debt that is repaid only after the number of senior creditors is repaid, a reflection of the jitters around AT1 bonds.
Aware of the potential impact of the controversial move, Frankfurt bank regulators at the Single Resolution Board and the European Central Bank distanced themselves from the Swiss solution, declaring that the euro zone’s common partners would always be the first to be liquidated before any AT1 slaves. you will take a hit.
“This approach has been used consistently in past cases and the actions of the SRB and the ECB are controlled during crisis banking interventions,” they said in a joint statement on Monday.
Why do banks also issue ‘Additional Tier 1’ collateral?
AT1 Bonds were created as an answer to the question of how to make the advisors pay without interrupting the supply of credit to the real economy.
In the aftermath of the global financial crisis of 2008, European bank regulators wanted to build more powerful shock absorbers on their balance sheets to guard against the need for unpopular tax credit.
But the new common equity shined in the new sectors — the highest quality capital around — is also the most expensive. Achieving stronger solvency levels by mandating Common Equity 1 (CET1) ratios that was disproportionately higher at a higher base than elsewhere had two effects.
One way to limit the profitability of European banks, and to put them at a disadvantage is that foreign peers are allowed to do so with more relaxed balance sheets. Second, that the appetite to extend private loans to small and medium businesses that tend to blood dispensing.
Enter contingently convertible (CoCo) debt.
Under the new regulatory regime “Basel III”, which the US.S. rather still adopted, a new type of asset was created: AT1 bonds that are either written or automatically converted to common equity to absorb the loss so that the bank’s solvency buffers are fully exhausted.
In exchange for the risk that investors would “buy-in” at any time and could lose everything, these securities would guarantee the borrower a higher return than the defaulted senior debt in the event of bankruptcy.
On Wednesday, Citigroup CEO Jane F
