After Credit Suisse’s rescue, which caused heavy losses and raised fears of collateral damage to other banks, the Bank of England attempted to reassure investors in debt.
Threadneedle Street, the European Central Bank and the European Central Bank spoke out against Monday’s decision of Switzerland’s financial regulator not to favor bondholders over shareholders in the highly discounted sale Credit Suisse to UBS.
In a rush-negotiated takeover that was mediated by Swiss officials, $17bn worth of bonds called AT1s owners saw their investments reduced to zero. Although it was expected that shareholders would be the first to go, UBS paid $3.25bn for equity.
The ECB, Single Resolution Board, and European Banking Authority jointly stated that the Swiss have not followed the post-financial crisis bailout hierarchy.
They stated that “In particular, common equity instruments (shareholders) are the first to absorb losses and only after they have been used fully would AT1s need to be written down.
“This approach has been used consistently in past cases and will continue guide the actions by the SRB/ECB banking supervision during crisis interventions. AT1 is an integral part of the capital structure for European banks and will continue to be so.
In the event of bank failure, the Bank of England stated that bank shareholders should be responsible for losses more than bondholders.
According to a Bank spokesperson, “Holders such instruments should expect losses in resolution or bankruptcy in the order in which they are placed in this hierarchy.”
The Bank of England and Brussels have rebuked Credit Suisse in an unusual manner.
International authorities took action because they were concerned that Swiss treatment of AT1s might undermine their wider use, and cut off $275bn funding source for European banks. Concerns that other European countries might repeat the Swiss experience led to bonds issued by European lenders plummeting.
Last night, investors were considering legal action. Quinn Emanuel in the USA said that it was in discussions with Credit Suisse investors to “represent a significant portion” of the AT1s’ total notional value.
As a way to help banks in times of crisis, the bonds were created in 2008 in response to the financial crisis.
These are also known by the acronym CoCos (or contingent convertibles) because they convert debt into equity in situations where banks are in trouble. This mechanism is designed to provide an automatic capital cushion for distressed lenders.
Credit Suisse assured its staff that, despite the crisis, it would continue to pay bonuses and raises this year.
This happened as shares of US bank First Republic plunged as much as 50% on Monday, after the bank’s credit rating was cut for a second time in a row.
Jamie Dimon, chief of JP Morgan, was reportedly leading talks to create a new rescue package. This came as the US crisis among regional banks continued.
A group of Wall Street banks including JP Morgan joined together last week to offer $30bn to First Republic.
Rishi Sunak, however, tried to reassure investors by stating that the UK’s banking system was safe from contagion.
A Downing Street spokesperson stated that “we believe we have an robust system, strong system” and added that the UK banks are “safety-capitalised”.
Following the UBS acquisition of Credit Suisse, shares in London-listed oil companies and banks slumped once more. Standard Chartered and Barclays fell 3pc each, respectively, making them two of the biggest falls on the FTSE 100.
The gold price also soared above $2,000 per ounce, the first time it has done so in over a year since the financial crises in Europe and the USA triggered a return of haven buying.
UBS’s five year credit default swap spreads, which are indicators of whether borrowers will pay their debts on time, rose 24 basis points from 78 to 156 after the announcement. They were at 78 base points a week earlier.
An investor will need to pay a premium to be insure against default of the underlying asset if the CDS value is higher.
UBS’s most risky debts also saw their value drop. Nearly 17 percent was the yield on UBS’s debt, which is equivalent to the interest rate that UBS would have to pay.