Credit Suisse: ECB tries to settle market after UBS deal wipes out $17bn of AT1 bonds
The European Central Bank said its banking sector was “resilient” today as it moved to settle volatile bond markets today following the controversial move to wipe out Credit Suisse AT1 bondholders last night.
As part of UBS’s rescue swoop for its beleaguered Swiss rival, regulators wrote off some £13.92bn ($17bn) of Credit Suisse additional tier 1 bonds (AT1) while offering some return to shareholders.
The move came despite AT1 holders taking hierarchy over shareholders in the bankruptcy process when absorbing losses, according to reforms rolled out by the Financial Stability Board after the 2008 financial crisis.
The move has angered Credit Suisse bondholders and prompted a rapid repricing of bonds across markets this morning.
The ECB has looked to settle investors’ fears, saying the banking sector was “resilient, with robust levels of capital and liquidity” and that AT1 bondholders in the bloc will take precedence over shareholders.
“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,” the central bank said in a statement.
“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 interventions.”
Michael Hewson, chief market analyst at CMC Markets said the move from Swiss regulators to wipe out the bondholders had “certainly raised a few eyebrows this morning”.
“With this bond repricing, the cost of capital for European banks will inevitably rise, and it is these concerns that appear to be behind the sell-off being seen today. as the price of these bail-in bonds gets re-priced,” he told City A.M.