““We were in an extremely fragile environment where we had this banking crisis in the United States and enormous nervousness of financial markets in general.” ”
— Thomas Jordan
That was Swiss National Bank chair Thomas Jordan, defending the decision by the country’s authorities to push for a takeover of Credit Suisse AG
over letting the bank go under.
European Union banking regulation lays out how to manage a bank’s failure in an orderly manner when it’s believed that a normal bankruptcy would cause financial instability.
“Under the circumstances, going into resolution would have triggered a bigger financial crisis, not only in Switzerland, but most likely globally,” Jordan said at a press conference on Thursday, as the central bank simultaneously discussed its decision to raise interest rates by 50 basis points.
“So it was clear, given the crisis environment, given the banking crisis in the U.S. and the fragility everywhere, that resolution would not work in order to stabilize the situation, but on the contrary, create enormous uncertainty and then would also put the Swiss financial system, including the Swiss economy in jeopardy. But not only in Switzerland…it could also [have been] the trigger of a bigger, larger financial crisis,” said Jordan.
As shares of Credit Suisse tumbled last week in wake of a U.S. banking crisis that led to the failure of three banks, Swiss officials orchestrated a $3.25 billion buyout of Credit Suisse by rival UBS Group AG
The deal included an emergency measure that infuriated bondholders and triggered a selloff of other European bank debt earlier this week. Swiss regulator FINMA ordered the complete write down of $17 billion worth of Credit Suisse’s Additional Tier 1 (AT1 or contingent convertible or CoCo) bonds, while shareholders would be paid out over $3 billion.
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The regulator on Thursday defended that decision in a statement. “The AT1 instruments issued by Credit Suisse provide contractually that they are written off in full in the event of a trigger event (viability event), in particular when extraordinary government support is granted,” said FINMA.
As the Swiss banking giant was granted assistance loans backed by a federal default guarantee on March 19, it became necessary for it to write down those bonds to zero.
“On Sunday, a solution was found to protect customers, the financial center and the markets. In this context, it is important that CS’s banking business continues to function smoothly and without interruption. That is now the case,” said FINMA Director Urban Angehrn.
The regulator further explained that AT1 instruments in Switzerland are designed to be written off or converted into Common Equity Tier 1 capital before the equity of the bank in question is completely used up or written off. Publicly issued by big banks, those instruments are mostly held by institutional investors due to their risk and large denominations, it added.
At Wednesday’s press conference, Federal Reserve Chairman Jerome Powell said he was concerned the Credit Suisse situation “might not go well” but said the deal appears to be a positive outcome.
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