Credit Suisse rescue: HSBC, Standard Chartered regulator tries to reassure bondholders
European banking supervisors, including the chief regulator for HSBC and Standard Chartered, sought to reassure bondholders on Monday about the adequacy of a class of riskier debt created to help avoid future bank bailouts after Credit Suisse's regulator moved to wipe out some US$17 billion of the lender's bonds.
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.
"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 ECB said in a statement.
Do you have questions about the biggest topics and trends from around the world? Get the answers with SCMP Knowledge, our new platform of curated content with explainers, FAQs, analyses and infographics brought to you by our award-winning team.
"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 extraordinary government support will trigger a complete write-down of the nominal value of all AT1 debt of Credit Suisse in the amount of around CHF 16 billion, and thus an increase in core capital," the Swiss Financial Market Supervisory Authority, or FINMA, said in a statement approving the deal on Sunday.
HSBC, one of Hong Kong's biggest banks, is regulated by the Bank of England. Photo: Elson Li alt=HSBC, one of Hong Kong's biggest banks, is regulated by the Bank of England. Photo: Elson Li>
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.
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.
A week ago, HSBC agreed to acquire SVB's British arm for a nominal fee of £1 (US$1.23) in a rescue deal that is expected to enhance its profile with technology and life sciences companies in Great Britain.
Hong Kong regulators separately sought to reassure investors on Monday, saying there was "low exposure" in the city to the collapse of several midsize American banks and the Credit Suisse rescue and little prospect of a repeat of the global financial crisis.
This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2023 South China Morning Post Publishers Ltd. All rights reserved.
Copyright (c) 2023. South China Morning Post Publishers Ltd. All rights reserved.
