The Bank of England sought to clarify its rules regarding the order in which shareholders and creditors should bear losses in the event of insolvency, in the wake of the controversial write-down of Credit Suisse Group AG’s riskiest bonds.
(Bloomberg) — The Bank of England sought to clarify its rules regarding the order in which shareholders and creditors should bear losses in the event of insolvency, in the wake of the controversial write-down of Credit Suisse Group AG’s riskiest bonds.
The central bank said in a statement on Monday that additional tier 1 instruments, the securities rendered worthless as part of the UBS Group AG takeover, rank ahead of common equity tier 1 (CET1) and behind tier 2 (T2), a mix of reserves, hybrid instruments and junior debt.
The wipe out of 16 billion francs ($17.2 billion) of Credit Suisse’s so-called AT1 bonds after UBS agreed to buy the bank is the biggest loss yet for Europe’s $275 billion market in these securities, which were created after the financial crisis to ensure losses would be borne by investors not taxpayers.
The move prompted an angry response from some AT1 bondholders who argued that they should have ranked ahead of shareholders, who received $3.3 billion as part of the deal.
The Bank of England added that was the approach taken toward Silicon Valley Bank UK, in which all AT1 and T2 instruments were written down in full and the whole of the company’s equity was transferred for a nominal £1 ($1.20).
“The UK’s bank resolution framework has a clear statutory order in which shareholders and creditors would bear losses in a resolution or insolvency scenario,” the BOE said. “Holders of such instruments should expect to be exposed to losses in resolution or insolvency in the order of their positions in this hierarchy.”
European regulators are rushing to reassure investors that shareholders should face losses before bondholders.
A joint statement from the Single Resolution Board, the European Banking Authority and the ECB Banking Supervision earlier on Monday asserted that junior creditors should bear losses only after equity holders have been fully wiped out.
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