A senior EU policymaker has reassured investors about a form of bank debt after holders of the securities in Credit Suisse were wiped out during its rapid-fire takeover by rival UBS.
Dominique Laboureix, chair of the Single Resolution Board (SRB), which is the body in charge of shutting down failed banks, said that the additional tier 1 (AT1) bank debt securities should not be viewed as “not investable any more.”
The deal between the two Swiss banks saw Credit Suisse’s AT1 bondholders lose $17 billion (€15.7 billion), while its shareholders received SFr3 billion (€3.01 billion). This is in spite of EU rules that state bondholders should be prioritised over equity investors in the case of a bank failure.
The move by the Swiss authorities prompted a joint statement from European regulators about the seniority of investors in banks and which should shoulder losses first. In the statement, the SRB, European Banking Authority and ECB Banking Supervision said: “In particular, common equity instruments are the first ones to absorb losses, and only after their full use would Additional Tier 1 be required to be written down.
“This approach has been consistently applied in past cases and will continue to guide the actions of the SRB and ECB banking supervision in crisis intervention.”
Laboureix said that despite the move by Switzerland, the EU would stick with the established order for investors. “We won’t take them by surprise,” he said. “We should be extremely clear on this crucial element: yes, indeed, we want to follow this order because it gives clarity to the investors.
“If not, who will invest in banking issuances if there is this possibility that each and every authority in the EU can decide whatever it wants depending on the conditions of the day?”
AT1 bonds were introduced following the Global Financial Crisis and now account for an estimated $260 billion of the debt market. Their function was to ensure banks were better capitalised, as the debt could be converted into equity if its capital levels fall below requirements.
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