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The ECB distances itself from the Swiss solution of sacrificing the bondholder with Credit Suisse

Date: March 29, 2024 Time: 13:25:08

The European Central Bank (ECB), as supervisor of the banking sector, the Single Resolution Board (SRB) and the European Banking Authority (EBA) have expressed their satisfaction with the measures adopted yesterday by the Swiss authorities to guarantee financial stability, but at the same time distance themselves from the adopted solution.

The reminder comes after UBS has agreed to pay 3 billion Swiss francs for 100% of Credit Suisse in a share swap that partly saves nearly 40% of the entity’s shareholders’ investment. However, the agreement contemplates the execution of contingent convertible bonds (CoCos), or AT1 bonds, worth 16 billion francs to absorb losses and recapitalize the bank.

“Common equity instruments are the first to absorb losses, and only after full use was additional Tier 1 capital required to be written off,” says the ECB

In this sense, the three institutions have registered that the resolution framework implemented in the European Union after the financial crisis establishes an order of priority according to which the shareholders and creditors of a bank in trouble must bear the losses.

In particular, common equity instruments are the first to absorb losses, and only after their full use will the amortization of additional Tier 1 capital be required. This approach has been applied systematically in previous cases and will continue to guide the actions of banking supervision by the SRB and the ECB in explosions in the event of a crisis, they recall in their statement. In this way, they defend that the additional Tier 1 is and will continue to be an important component of the capital structure of European banks.

European regulators have defended the soundness of the capital and liquidity position of European banks. “The European banking sector is resilient, with solid levels of capital and liquidity,” the financial authorities said in a joint statement, after UBS agreed to buy Credit Suisse on Sunday with the backing of the Swiss government.

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Puck Henry
Puck Henry
Puck Henry is an editor for ePrimefeed covering all types of news.
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