Credit Suisse rescue: HSBC, Standard Chartered regulator tries to reassure bondholders
- Bank of England, European Central Bank say shareholders will bear losses before bondholders in bank insolvencies
- Move to calm markets comes after Swiss authorities wipe out about US$17 billion of Credit Suisse’s debt as part of negotiated rescue
The European Central Bank and the Bank of England separately issued statements outlining the hierarchy for how shareholders and debtholders will bear losses in a bank insolvency.
“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.”
The Bank of England, which regulates two of Hong Kong’s biggest banks, HSBC and Standard Chartered, separately said, “The UK’s bank resolution framework has a clear statutory order in which shareholders and creditors would bear losses in a resolution or insolvency scenario.”
Over the weekend, the Swiss National Bank negotiated a rescue of Credit Suisse by larger Swiss rival UBS after the bank faced a crisis of confidence following the collapse of Silicon Valley Bank and another midsize US lender unnerved financial markets.
As part of the merger, Swiss authorities triggered a complete writedown of 16 billion Swiss francs (US$17 billion) of so-called additional Tier 1 (AT1) debt held by the bank late on Sunday.
Meanwhile, Credit Suisse shareholders will receive one share of UBS for every 22.48 shares of the lender they held in an all-share transaction valued at US$3.2 billion.
The move threatens to upset the accepted order for how losses are borne in an insolvency. Traditionally, shareholders suffer losses first, followed by different layers of creditors.
The decision to wipe out Credit Suisse’s AT1 bonds has incensed Swiss debt holders, with several threatening on Monday to file legal action.
AT1 debt, also known as contingent convertible securities, or Cocos, were created in the aftermath of the global financial crisis in 2008 to help banks absorb losses and avoid future taxpayer-funded bailouts.
The debt is considered riskier because it can be converted to equity or written down completely. It tends to pay a higher yield than similarly rated debt.
Concerns over the move to wipe out Credit Suisse’s AT1 weighed on bank stocks during Asian trading on Monday and fuelled record declines in the AT1 debt of some Asian lenders.
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HSBC was one of the worst performers in Hong Kong’s benchmark Hang Seng Index on Monday, with its stock declining 6.2 per cent. Standard Chartered’s shares fell 7.3 per cent on Monday in Hong Kong.