European banks trim losses after EU supervisors defend AT1 bonds

By Geoffrey Smith 

Investing.com -- European bank stocks trimmed their losses on Monday after regional bank supervisors rushed to distance themselves from a Swiss decision to impose losses on Credit Suisse's (SIX:CSGN) subordinated debt holders as part of a deal to sell the bank to UBS. 

The European Central Bank, the Single Resolution Board, and the European Banking Authority said in a joint statement they "welcome the comprehensive set of actions taken yesterday by the Swiss authorities in order to ensure financial stability," but noted that they would have gone about it differently, wiping out shareholders before writing off so-called Additional Tier-1 capital, a form of deeply subordinated debt.

By contrast, Swiss regulator Finma had imposed a $17 billion write-off of Credit Suisse's AT1 bonds at the weekend, despite allowing Credit Suisse shareholders to receive some CHF3 billion ($1 = CHF0.9272). That was in line both with Swiss regulation and with the bonds' terms sheets, but went against the wider convention of requiring shareholders to absorb losses first. 

Euro zone banks have issued tens of billions of euros of AT1 bonds to bolster their capital levels since the last financial crisis, and the price of those bonds fell sharply on Monday after the Swiss move, as investors reassessed the risks involved in holding such instruments.

The ECB/SRB/EBA statement however made clear that "Common equity instruments are the first ones to absorb losses, and only after their full use would Additional Tier 1 be required to be written down" in the resolution of a failed bank in the euro zone. "This approach has been consistently applied in past cases and will continue to guide the actions of the SRB and ECB banking supervision in crisis interventions."

The statement is consistent with the resolution of Spain's Banco Popular, the only instance to date in which the euro zone's AT1 instruments have been 'bailed in'.

"The European banking sector is resilient, with robust levels of capital and liquidity," the supervisors added. 

Euro zone bank stocks, which had opened sharply lower on contagion fears, trimmed their losses by midday in Europe. By 08:45 ET (12:45 GMT), Deutsche Bank (ETR:DBKGn) and ING Group (AS:INGA), two of the biggest issuers of AT1, were down 1.8% and 3.0%, respectively, having initially lost over 6%. Societe Generale (EPA:SOGN) stock was down 2.5% while BNP Paribas (EPA:BNPP) stock was down 1.0%. Shares in Intesa Sanpaolo (BIT:ISP), Caixabank (BME:CABK), BBVA (BME:BBVA), and Allied Irish Bank (IR:AIBG) had all completely erased losses to trade over 1% higher on the day.