The sale of Credit Suisse to UBS appears to have mitigated some of the investor fury 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 shaken it since the collapse of Silicon Valley Bank (SVB) in the US.
The absorption agreed by the Swiss Government, the country's regulators and supervisors and the two entities involved will be carried out through an exchange of shares (there is no cash payment) with an exchange ratio that responds to the formula 1x 22.48, that is, the shareholders of Credit Suisse will receive one share of UBS for every 22.48 shares of the bankrupt bank.
The controversy, however, does not come so much from this equation as from the conditions of the resolution of the bank. The Swiss Financial Market Supervisory Authority (Finma) indicated yesterday that the support measures deployed by the Government of the country for UBS to acquire Credit Suisse will cause a full amortization of the nominal value of all the 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 enters 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 owners of unsecured bonds suffer. In the case of Credit Suisse, it will be the latter who will have to bear the consequences of the rescue and that has introduced a new source of uncertainty in the market. Investors in the rest of the European banks fear that the regulators involved will change the step in the same way they have done in Switzerland and a hypothetical resolution in Europe will end up ending 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 some time because the operation of UBS and Credit Suisse implies a loss for holders of AT1 bonds (the riskiest) of 15,800 million Swiss francs, 100% of the investment," says Bankinter's Analysis Department. "It's an unusual move, especially when Credit Suisse shareholders don't lose 100%, and it can have a contagion effect on the rest of the AT1 bonds in the sector. That is, it has a negative impact on the cost of bank financing and the risk premium of the sector," they add.
The absorption operation alters the perception of risk of the bank's financing instruments, which, in the short term, is expected to mean an increase in the cost of the famous CoCos. "Banks 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, Chief Investment Officer at MyInvestor.
Message from the ECB
Fears about the mechanism used by Switzerland were responsible for the collapses that banks registered again in the main regional markets at the opening of Monday's session. In Spain, Sabadell lost more than 7% at the start and the losses were repeated in the rest of large entities. Everything pointed to a new black Monday [which finally was not], which forced the highest authorities of regional supervision and regulation to intervene, with the president of the European Central Bank, Christine Lagarde, at the helm.
The French president, who yesterday appeared before the Committee on 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 in terms of the conditions of resolution of banking entities. "All three, EBA, the ECB as supervisor and the SRB have been very specific in terms of the order of priority applied in Europe," he said.
Lagarde was referring to a joint statement issued by the three entities to try to calm the markets and remind that in a possible intervention in case of crisis, the ordinary capital instruments of the entities would be the first to bear the losses, thus departing from the line applied by the Swiss authorities in the case of Credit Suisse. "In particular, common equity instruments are the first to absorb losses, and only after full use would the amortization of additional Tier 1 capital be required," the institutions said in the statement. This approach has been systematically applied in previous cases and will "continue to guide" the actions of the banking supervision 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 said after last Thursday's meeting in Frankfurt. "We are closely monitoring events in the market and are ready to respond as necessary to preserve price stability and financial stability in the euro area," he repeated in parliament.
According to The Trust Project criteria
- Credit Suisse