Fight looms over who pays in bank crises after $17 billion Credit Suisse writedown

20 March 2023 11:44

UBS Bank logo on bridge with Credit Suisse in background

A fight over who pays when a bank falls into difficulty is likely to ensue after Credit Suisse’s takeover by UBS resulted in a surprise writedown of $17 billion for bondholders.

The announcement yesterday by Swiss authorities that UBS would buy its ailing domestic rival for a bit over $3 billion turned on its head the hierarchy-of-claims process triggered when a bank becomes unviable.

No bank failure or takeover of a lender the size of Credit Suisse has happened since the 2008 financial crisis, but new rules dictate that if it happens, shareholders should be the ones to be wiped out first before bondholders face any pain.

But the full takeover of Credit Suisse will trigger a “complete writedown” of “all AT1 shares of Credit Suisse in the amount of around 16 billion Swiss francs,” the Swiss financial regulator said yesterday. AT1 shares, or additional tier one shares, are a type of risky bond created after the financial crash designed to take loss during a crisis — but, usually, that would be after shareholders have been written down first.

Conversely, Credit Suisse shareholders will receive 1 UBS share for every 22.48 Credit Suisse shares held. That is equivalent to 0.76 Swiss francs per share, with a total consideration of 3 billion Swiss francs ($3.2 billion).

While the dust settles on what the takeover means for the safety of banks, particularly as the Swiss troubles follow the collapse of US lenders last week, as well as the efficacy of financial regulation 15 years on from the financial crisis, the issue of who takes the losses when a bank is on the brink of failure will be center stage. After all, the purpose of post-crisis bank crisis management rules is to ensure that shareholders and investors, not taxpayers, absorb losses — and in a clear hierarchy of claims.

EU regulators are already weighing in. In a joint statement today, the European Central Bank, Single Resolution Board and European Banking Authority said they welcomed the Swiss action to ensure financial stability, adding that the European banking sector is resilient.

But their statement also pointedly sought to calm investors by stating in no uncertain terms that as far as the EU was concerned, the hierarchy of claims would see common equity instruments, including shares, used first to absorb losses.

“The resolution framework implementing in the European Union the reforms recommended by the Financial Stability Board after the Great Financial Crisis has established, among others, the order according to which shareholders and creditors of a troubled bank should bear losses,” the statement says.

“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. 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. Additional Tier 1 is and will remain an important component of the capital structure of European banks,” the statement adds.

It would have been made clear to Credit Suisse investors that AT1 bondholders would face losses before shareholders, but it may still possibly have come as a grim surprise to some if they hadn't read the prospectus documents fully.

While these ejected investors consider their next move, a regulatory debate will be hard to avoid on whether jurisdictions are sufficiently aligned on who takes the biggest hit when a bank falls into difficulty.

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