European regulators assert shareholder hierarchy in wake of Credit Suisse bond wipeout


30th March 2023 – (Brussels) European regulators have distanced themselves from the Swiss decision to write off $17 billion of Credit Suisse’s bonds, stating that shareholders’ investments would be written down first. Dominique Laboureix, the chair of the EU’s Single Resolution Board, spoke to CNBC in an exclusive interview, stating that in a banking resolution in the European context, the standard hierarchy sees equity investments classed as secondary to bonds when a bank is rescued. This comes after Swiss regulator FINMA announced that Credit Suisse’s additional tier-one (AT1) bonds, regarded as risky investments, would be written down to zero.

The Single Resolution Board, in a joint statement with the ECB Banking Supervision and the European Banking Authority, stated that “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 Swiss decision has led some Credit Suisse AT1 bondholders to consider legal action, sparking uncertainty for bondholders globally. The Single Resolution Board became operational in 2015, ensuring the least possible impact on the real economy if a bank fails in the eurozone. Switzerland is not part of the European Union, so it does not fall under the region’s banking regulation.

The recent banking turmoil started with the fall of Silvergate Capital, a bank focused on cryptocurrency, and regulators subsequently closed Silicon Valley Bank and then Signature Bank following significant deposit outflows to prevent contagion across the sector. Since then, First Republic Bank received support from other banks and authorities asked UBS to rescue Credit Suisse. Deutsche Bank’s shares slid, leading some to question if the German bank could be next, although analysts have stressed that its financial position looks strong. For regulators in the eurozone, the collapse of Silicon Valley Bank, and perhaps subsequent events, could have been avoided if tougher banking rules were in place.

European lawmakers have previously told CNBC that U.S. regulators made mistakes in preventing the failure of Silicon Valley Bank and others. One of the key differences between the U.S. and Europe is that the former has a more relaxed set of capital rules for smaller banks. Basel III, for instance, a set of reforms that strengthens the supervision and risk management of banks and has been developed since 2008, applies to most European banks. But American lenders with a balance sheet below $250 billion do not have to follow them. Despite the recent turbulence, European regulators argue the sector is strong and resilient, particularly because of the level of controls introduced since the Global Financial Crisis.

“If you look at the past events, such as Covid, Archegoes, Greensill, the Gilt crisis in the U.K. last September, etc., during the last three years, the resilience of the European banking system was very strong based on very good solvency and very good liquidity and a very good profitability”, said Laboureix. He also added that there is a good resiliency in the banking system but that regulators still need to be vigilant.