So-called AT1 bonds, also known as CoCos, were in focus on Monday as shares of European banks showed significant declines in the wake of the rescue of Credit Suisse engineered by Swiss authorities by merging it with UBS.
The merger package announced late on Sunday means that some 16 billion Swiss francs in Credit Suisse’s AT1 debt will be written off to zero at the orders of the Swiss regulator Finma, which said this move would help bolster the bank’s capital. Several European banks, notably from Germany and France, hold Credit Suisse AT1 debt.
The write-off of Credit Suisse’s AT1 debt could be triggering a revaluation of similar securities issued by other banks.
The exact exposure of other banks to Credit Suisse’s bonds is not yet clear. Statistics on foreign bond holdings in Switzerland point to significant general exposures for German and French banks in particular. German banks held $11.5 billion in Swiss debt at the end of September, and French $8.0 billion. Japanese banks held $6.7 billion; Belgian $2.0 billion. Dutch banks had no such exposure at the end of September.
AT1 stands for “Additional Tier 1”. This type of debt is part of a family of bank capital securities known as Contingent Convertibles or “Cocos”. AT1’s are bonds issued by banks that contribute to the total level of capital they are required to hold by regulators.
As part of the merger deal between UBS and Credit Suisse, the Swiss authorities acted in line with Switzerland’s bank resolution framework, which is aligned with global bank resolution standards adopted in the wake of the 2008 financial crisis. The framework sees to it that taxpayers are shielded when banks get into trouble, forcing bondholders to be the first to incur losses when a bank goes into resolution.
CoCos and AT1s are seen as the lowest rung of bank debt. While they can generate attractive returns in good times, they’re set up as the first to feel the pain when a bank gets into trouble. This type of debt that banks issued also counts as “regulatory debt” and thus can count towards the banks capital ratios. A bank can bolster its ratios, for which minimum requirements are set, by issuing such debt.
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