April 16, 2024

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EU regulators are distancing themselves from Credit Suisse’s writedowns

EU regulators are distancing themselves from Credit Suisse’s writedowns

  • The Swiss decision prompted some Credit Suisse AT1 bondholders to consider legal action, and sent uncertainty to bondholders around the world.
  • “We wanted to tell investors this very clearly, to avoid misunderstandings: we have no choice but to respect this hierarchy,” the head of the EU’s Individual Decision Council told CNBC.
  • For eurozone regulators, the collapse of the Silicon Valley bank, and possibly subsequent events, could have been avoided if there had been stricter banking rules.

BRUSSELS – European regulators have distanced themselves from the Swiss decision to cancel $17 billion of Credit Suisse bonds in the wake of the bank’s bailout, saying they would write down shareholders’ investments first.

Dominique Laborex, president of the European Union’s Individual Decision Council, had a clear message for investors in an exclusive interview with CNBC.

“in [a banking] The decision here, in the European context, is that we will follow the hierarchy, and we wanted to tell investors about it very clearly, to avoid being misunderstood: we have no choice but to respect this hierarchy,” Laborex said on Wednesday.

It comes after Swiss regulator FINMA announced earlier this month that Credit Suisse’s Additional Tier 1 (AT1) bonds, widely seen as relatively risky investments, would be cut to zero, while equity investors They will receive more than $3 billion as part of the bank’s takeover. by UBS, which angered bondholders.

In a joint statement with the European Central Bank’s Banking Supervision and European Banking Authority, the Single Decision Board said on March 20 that “ordinary equity instruments are the first to absorb losses, and only after their full use will additional Tier 1 need to be written.”

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The standard hierarchy or framework considers equity investments to be categorized as secondary to bonds when the bank bails out.

The Swiss decision prompted some Credit Suisse AT1 bondholders to consider legal action, and sent uncertainty to bondholders around the world.

Shown here, Credit Suisse’s second largest bank in Switzerland, next to the Swiss flag in downtown Geneva.

Fabrice Coverini | AFP | Getty Images

“As the decision authority responsible for the decision framework of the banking union, I can tell you that I will fully and completely respect the legal framework. So in the decision, when adopting a solution plan, I will respect this hierarchy starting with the absorption of the stock group, then AT1 and then level 2 and then the rest.”

Switzerland is not part of the European Union and is therefore not subject to banking regulations in the region.

The Single Resolution Council began operating in 2015 in the aftermath of the global financial and sovereign debt crises. Its main task is to ensure that there is the least possible impact on the real economy in the event of bank failure in the eurozone.

The recent banking turmoil in the US began with the downfall of Silvergate Capital, a cryptocurrency-focused bank. Soon after, regulators shut down Silicon Valley Bank and then Signature Bank after large deposit inflows in an effort to prevent contagion across the sector.

Since then, First Republic Bank has received support from other banks and in Switzerland, the authorities have asked UBS to bail out Credit Suisse. Late last week, Deutsche Bank shares fell, prompting some to wonder if the German bank is next, although analysts emphasized that its financial position appears solid.

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For eurozone regulators, the collapse of the Silicon Valley bank, and possibly subsequent events, could have been avoided if there had been stricter banking rules.

“A bank like this would have been subject to strict rules,” Laborex said. “I don’t judge…but my understanding is that these mid-sized banks, the so-called mid-size banks in the US, were actually big banks compared to our banks in the Banking Union.”

European lawmakers previously told CNBC that US regulators made mistakes in preventing the failure of SVB and others.

One of the main differences between the US and Europe is that the former has a more relaxed set of capital rules for smaller banks.

Basel III, for example – a set of reforms that strengthen supervision and risk management for banks that has been in development since 2008 – applies to most European banks. But US lenders with balance sheets less than $250 billion don’t have to follow suit.

Despite the recent turmoil, European regulators argue that the sector is robust and resilient, particularly due to the level of controls introduced 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. — over the last three years, the resilience of the European banking system has been very strong based on good solvency, very good liquidity, very good profitability. “.

“I really think that yes, there is good resilience in our banking system. It doesn’t mean we don’t have to be vigilant.”

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— CNBC’s Elliott Smith contributed to this report