Jeffrey Smith
Investing.com — European bank stocks and bonds opened sharply lower on Monday following the Swiss regulator’s handling of the financial crisis. credit suisse Collapses investors who have tripped on their feet and puts much of the bank bond market into question.
Swiss financial regulator Finma on Sunday sold about $17 billion in additional Tier 1 bonds issued by Credit Suisse Group (SIX:CSGN) to local rival UBS (SIX:UBSG) after the disaster-hit bank. ordered a full write-off as part of the transaction. That is despite the fact that shareholders receive some compensation for their shares.
The move sparked a plunge in Europe’s $200 billion AT1 market on Monday as investors sold off bonds issued by other banks. Low liquidity made it difficult to quantify the loss, but traders said prices fell by as much as 20 cents against the euro or dollar.
Bank stocks also saw sharp moves, with Credit Suisse eventual buyer UBS being one of the hardest hit, dropping 13.7% by 04:30 ET (08:30 GMT). bottom.
Usually, when a bank fails, the shareholders are the first to lose their money, while creditors and depositors only suffer losses after the shares are devalued to zero. However, the terms of the bonds issued by CS explicitly stated that they were subordinated to equity. This point seems to have been overlooked by at least some holders of that bond.
“The question now is how to calculate risk,” a European bond trader told Investing.com.
“Until yesterday, we knew that AT1 risk was based on PONV and CET1 levels,” he said, noting that for a bank’s capital level (Common Equity Tier 1, or CET1), regulators would allow AT1 bondholders to You mentioned the popular belief that losses are only imposed on It has fallen to what regulators call the “non-viability point.” Finma, by contrast, had taken advantage of the slack in his AT1 term sheet in CS to order bail early on.
The handling of the CS case meant that AT1 bonds were now exposed to broader economic risks, “economic risks are very difficult to understand and price,” traders said.
Gildas Sully, partner at Axion Alternative Investments, told Bloomberg Television: “The move is completely unexpected. “There are trust issues, there are trust issues with regulators.”
AT1 bonds are not generally held by retail investors, but are popular with high net worth individuals and professional institutional investors attracted by higher yields. Banks across Europe have, of course, issued them over the past decade to increase the number of shares to enhance their level of loss-absorbing capital without diluting their profits. A sharp decline raises the bank’s overall cost of capital.
Get the news you need
Read market-moving news with a personalized feed of the stocks you care about.
get the app
Two other major issuers of AT1 bonds, ING (AS:INGA) and Deutsche Bank (ETR:DBKGn) shares fell by 6.6% and 6.2%, respectively. barclays (LON:BARC) shares fell 5.5%, Societe Generale (EPA:SOGN) shares fell 4.4%.
