ANALYSIS: By wiping out Credit Suisse hybrid investors at the expense of shareholders, Swiss regulators almost did more harm to the global banking system.
When European markets opened on Monday morning there was a deep sense of foreboding. The decision by the Swiss regulators to wipe out $US17 billion of Credit Suisse’s hybrids to broker its purchase by UBSThe most jarring aspect was that the total loss of hybrid holders was not shared by Credit Suisse’s equity investors, which rank below them in the capital structure.
Why was this so important? The loss of faith in the AT1 market had the obvious consequence of materially increasing the cost of capital for the banking system. But where does that leave us now? It will be interesting to see how the AT1 market settles after this nerve-wracking and costly incident.From the moment the Credit Suisse wipeout was made apparent, there was talk of legal action among holders who felt unfairly dudded.
Additional tier one bonds, or hybrids, are curious creatures that seem easy to value in good times, when they provide an enhanced yield, but wickedly complex in tough times when outcomes are uncertain, unpredictable and often at the hands of panicked regulators.
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