- The Swiss decision has prompted some Credit Suisse AT1 bondholders to consider legal action and created uncertainty among bondholders around the world.
- “We wanted to make it very clear to investors to avoid any misunderstandings: we have no choice but to respect that hierarchy,” the chair of the EU’s Single Resolution Board told CNBC.
- For eurozone regulators, the collapse of Silicon Valley Bank and possible subsequent events could have been avoided had stricter banking rules been in place.
BRUSSELS — European regulators distanced themselves from Switzerland’s decision to wipe out $17 billion of Credit Suisse bonds as part of the bank’s rescue, saying they would write off shareholders’ investments first.
Dominique Laboureix, Chair of the EU’s Single Resolution Board, had a clear message for investors in an exclusive interview with CNBC.
“In [a banking] In a solution here we would follow the hierarchy in the European context and we wanted to make it very clear to investors to avoid any misunderstandings: we have no choice but to respect this hierarchy,” Laboureix said on Wednesday.
It comes after Swiss regulator FINMA announced earlier this month that Credit Suisse’s additional Tier One (AT1) bonds, widely seen as relatively risky assets, would be written down to zero while equity investors bid on the bank’s takeover over $3 billion would be received from UBS, angering bondholders.
In a joint statement with the ECB Banking Supervision and the European Banking Authority on March 20, the Single Resolution Board said that the “equity capital instruments are the first to absorb losses and only after their full use would the Additional Tier 1 be required to be written up .”
The standard hierarchy or framework ranks equity investments as secondary to bonds when a bank is bailed out.
The Swiss decision has prompted some Credit Suisse AT1 bondholders to consider legal action and created uncertainty among bondholders around the world.
Switzerland’s second largest bank, Credit Suisse, is seen here next to a Swiss flag in downtown Geneva.
Fabrice Coffrini | AFP | Getty Images
“As the resolution authority responsible for the Banking Union’s resolution framework, I can tell you that I will fully respect the legal framework. So when I adopt a resolution concept, I will respect that hierarchy, starting with equity stack inclusion, and then AT1 and then Tier 2 and then the rest,” said Laboureix.
Switzerland is not part of the European Union and is therefore not subject to the region’s banking regulation.
The Single Resolution Board became operational in 2015 in the wake of the global financial crisis and sovereign debt crisis. Its main function is to ensure that the failure of a bank in the eurozone has as little impact on the real economy as possible.
The recent banking turmoil began in the US with the fall of Silvergate Capital, a cryptocurrency-focused bank. Shortly thereafter, regulators shut down Silicon Valley Bank and then Signature Bank after significant outflows of deposits to avoid contagion across the sector.
Since then, First Republic Bank has received support from other banks, and in Switzerland, authorities have asked UBS to bail out Credit Suisse. Late last week, shares of Deutsche Bank tumbled, leading some to question whether Deutsche Bank could be next, although analysts have stressed that its financial position looks strong.
For eurozone regulators, the collapse of Silicon Valley Bank and possible subsequent events could have been avoided had stricter banking rules been in place.
“A bank like this should have been subject to strict rules,” Laboureix said. “I’m not judging… but I understand that these mid-tier banks, called mid-tier banks in the US, were actually big banks compared to ours in the Banking Union.”
European lawmakers have previously told CNBC that US regulators made mistakes in preventing the collapse of SVB and others.
One of the main differences between the US and Europe is that the former have looser capital requirements for smaller banks.
For example, Basel III – a reform package that strengthens bank supervision and risk management and has been in development since 2008 – applies to most European banks. But American lenders with balance sheets under $250 billion don’t have to follow suit.
Despite the recent turmoil, European regulators argue that the sector is strong and resilient, particularly given the controls put in place since the global financial crisis.
“If you look at past events – I mean Covid, Archegoes, Greensill, the Gilt crisis in the UK last September etc etc etc – over the last three years the resilience of the European banking system has been very strong, based on very good solvency and very good liquidity and very good profitability,” said Laboureix.
“I really think our banking system has good resilience. That doesn’t mean we don’t have to be vigilant.”
— CNBC’s Elliot Smith contributed to this report