In the wake of the controversy-sparked write-down of Credit Suisse Group AG’s most risky bonds, the Bank of England wanted to clarify its rules on how creditors and shareholders should share losses in insolvency.
Monday’s statement by the central bank stated that additional tier 1, the securities rendered useless as part of the UBS Group AG takeover put them ahead of common equity Tier 1 (CET1), and behind T2 (T2), which is a mixture of reserves, hybrid instruments, and junior debt.
The destruction of Credit Suisse’s AT1 bonds ($17.2 Billion) after UBS bought the bank is the largest loss Europe’s market of these securities has suffered since the financial crisis. These securities were created to protect investors and not taxpayers.
Some AT1 bondholders were furious at the move, arguing that they should have been ranked above shareholders who received $3.3billion as part of this deal.
The Bank of England stated that this was the approach towards Silicon Valley Bank UK. All AT1 and T2 instruments were fully written down and all equity transferred for a nominal £1 ($1.20).
“The UK’s bank resolution framework contains a clear statutory order in respect of which creditors and shareholders would be liable for losses in a resolution situation or insolvency scenario.”
“Holders such instruments should expect to lose resolution or insolvency in accordance with the order in which they are placed in this hierarchy.”
European regulators rush to reassure investors that shareholders shouldn’t be subject to losses before bondholders.
On Monday, a joint statement by the Single Resolution Board and the European Banking Authority stated that junior creditors can only bear losses after equity holders are fully wiped out.