The sale of Credit Suisse to UBS seems to have assuaged some of the investor anger against banks in Europe, but it has opened another front for the sector whose consequences threaten to extend the crisis of confidence and credibility that has rocked it since the collapse of Silicon Valley Bank (SVB) in the US.
The absorption agreed by the Swiss Government, the regulators and supervisors of the country and the two entities involved will be carried out through an exchange of shares (there is no payment in cash) with an exchange equation that responds to the formula 1x 22.48, that is , Credit Suisse shareholders will receive one UBS share for every 22.48 shares of the failed bank.
The controversy, however, does not come so much from said equation as from the conditions of the resolution of the bank. The Swiss Financial Markets Supervisory Authority (Finma) indicated yesterday that the support measures deployed by the Swiss government for UBS to acquire Credit Suisse will cause a full amortization of the face value of all AT1 debt (known as contingent convertibles). or CoCos) of Credit Suisse, whose amount would be around 16,000 million francs (16,185 million euros).
The operation does not respect the traditional order of absorption of losses when a bank goes into resolution, where the first to lose their investment are the shareholders and, if this is not enough to absorb the impact of bankruptcy, then the bondholders suffer not guaranteed. In the case of Credit Suisse, it will be the latter who will have to bear the consequences of the bailout and this has introduced a new source of uncertainty in the market. The investors of the rest of the European banks fear that the regulators involved change the step in the same way that they have done in Switzerland and a hypothetical resolution in Europe ends up being settled in the same way as in the Swiss country.
Experts find such fears understandable. “It is inevitable that some concern about the sector will persist for a while because the operation of UBS and Credit Suisse implies a loss for AT1 bondholders (the most risky) of 15.8 billion Swiss francs, 100% of the investment,” points out Bankinter’s Analysis Department. “This is an unusual measure, especially when Credit Suisse shareholders do not lose 100%, and it may have a contagion effect on the rest of the AT1 bonds in the sector. In other words, it has a negative impact on the cost of bank financing and the sector risk premium”, they add.
The takeover operation alters the perception of risk of bank financing instruments which, in the short term, will foreseeably mean that the famous CoCos will become more expensive. “Entities may have to pay more to finance themselves in the immediate term and may have to give more explanations to potential investors because there may be more reluctance to enter this asset class,” says Ignasi Viladesau, Director of Investments at MyInvestor.
Fears over the mechanism used by Switzerland were responsible for the collapses that the banks registered again in the main regional markets at the opening of the session on Monday. In Spain, Sabadell came to lose more than 7% at the start and the losses were repeated in the rest of the large entities. Everything pointed to a new Black Monday [which finally was not], which forced the intervention of the highest regional supervisory and regulatory authorities, with the president of the European Central Bank, Christine Lagarde, at the helm.
The French president, who appeared yesterday before the Commission of Economic and Monetary Affairs of the European Parliament, took advantage of the focus to make it clear that Switzerland does not set the standards in Europe regarding the resolution conditions of banking entities. “All three, the EBA, the ECB as supervisor and the SRB have been very specific in terms of the order of priority that applies in Europe,” she said.
Lagarde was referring to a joint statement issued by the three entities to try to calm the markets and remember that in an eventual intervention in the event of a crisis, the ordinary capital instruments of the entities would be the first to bear the losses, thus separating themselves from the line applied by the Swiss authorities in the case of Credit Suisse. “In particular, ordinary capital instruments are the first to absorb losses, and only after their full use would the amortization of additional Tier 1 capital be required,” the institutions point out in the statement. This approach has been applied systematically in previous cases and “will continue to guide” the banking supervision actions of the SRB and the ECB in crisis interventions, they point out.
Lagarde also took advantage of her appearance to reiterate that the Eurobank is prepared to provide liquidity to entities if necessary, as she already said after the meeting last Thursday in Frankfurt. “We are closely monitoring events in the market and we are ready to respond as necessary to preserve price stability and financial stability in the euro area,” he repeated in Parliament.
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