The markets continue to falter, despite the incentivized purchase of Credit Suisse by its main competitor, UBS, by Swiss authorities, the calm messages of ECB chief Christine Lagarde, or the concerted actions of major central banks to facilitate liquidity. immersed by doubts and into volatility. Bank stocks continue to be penalized and paint stock market panels red; this is something that was intended to be avoided with the UBS-Credit Suisse operation, but variability prevails What’s happening?
1. What happens in the high-risk bank bond market?
One of the factors contributing to the tension is Credit Suisse AT1 bonds. Under the package of measures that led to the acquisition of Credit Suisse by Swiss regulator UBS, financedecided that Credit Suisse’s portfolio should consist of these securities, worth approximately 16,000 million euros, to be amortized at zeroso they become worthless. Such titles Issued by European banks and better known as ‘Cocos’It is designed to prevent contagion in the financial sector as they create an easily accessible source of bank capital to increase the solvency of organizations. Remaining in the list of defaulting creditors for other types of debt, a higher return, but with a higher risk in return for those who have. These bonds issued by Credit Suisse were redeemed to zero in 2019, A market valued at around €258,000 million in Europerang alarm bells among investors. The forecast is that the cost of these titles will become more expensive due to their even greater risk.
2. Why does tension prevail?
Money is terrifying, and on the ‘floors’ the phrase ‘when the river sounds…’ is normally imposed. Despite the authorities’ calls for calm, investors are cautious. After the fall of the Americans Silicon Valley Bank (SVB) and Signature Bank and custom recovery First RepublicThe tsunami reached Europe and hit Credit Suisse, one of 30 banks that was embroiled in several scandals and lost more than €7,000 million last year and is considered systemic worldwide. Despite the acquisition operation by UBS, doubts and fears remain that there may be other cases, which the European Central Bank (ECB) has denied. It is difficult to restore calm among investors.
3. Are the recovery mechanisms designed after the 2008 crisis working?
With the fall of Lehman Brothers after the 2008 crisis, capital buffers were created. shareholders and bondholders who undertake the bailout of businesses in the first place. The UBS-Credit Suisse operation questioned this mechanism. This is an amount called MREL, the English acronym for “minimum requirement equity and eligible liabilities”, which came into effect with the banking union in November 2014 and secures all European banks, although its full implementation is from 2016. HE private equity instruments for these situations are always available should their use be necessary.. As an additional requirement, it is independent of the capital requirements to which businesses are subject and is determined by supervisors. It provides three levels of intervention in the event of a banking crisis. The first to be executed is called CET1 plus retained earnings reserves from previous exercises. second degree ‘Additional Tier 1’, Contingent convertible bonds (“coconuts”) that the Swiss authorities have determined to be worth 0 euros in the case of Credit Suisse. It is a type of debt that can be converted into stocks if the bank’s capital ratio falls below a certain level, with a high return but with a higher risk. third grade secondary bonds. Bankruptcy of the company in Spain popular Bank, shareholders and debt holders of both AT1 and the subsidiary lost their investments. HE SantanderIt offered compensation to minority shareholders who participated in Popular’s 2016 expansion or held subordinate bonds, which held the bank.
4. Is Credit Suisse’s situation comparable to Popular?
not him. In fact, Credit Suisse shareholders will receive 0.76 Swiss francs per share, which the organization closed at 1.86 last Friday. In any case they won’t lose all their investment, as in Popular. The same is not true for AT1 high-risk bond holders, who will see their nearly €16,000 million investment turn into a piece of paper. Minor bond holders are also unaffected.