EU regulators distance themselves from Credit Suisse bond writedowns

BRUSSELS — European regulators distanced themselves from the Swiss decision to wipe out $17 billion of Credit Suisse‘s bonds in the wake of the bank’s rescue, saying they would write down shareholders’ investments first.

Dominique Laboureix, chair of the EU’s Single Resolution Board, had a clear message for investors in an exclusive interview with CNBC.

“In [a banking] resolution here, in the European context, we would follow the hierarchy, and we wanted to tell it very clearly to the investors, to avoid to be misunderstood: we have no choice but to respect this hierarchy,” Laboureix said Wednesday.

It comes after Swiss regulator FINMA announced earlier this month that Credit Suisse’s additional tier-one (AT1) bonds, widely regarded as relatively risky investments, would be written down to zero, while stock investors would receive over $3 billion as part of the bank’s takeover by UBS, angering bondholders.

In a joint statement with the ECB Banking Supervision and the European Banking Authority, the Single Resolution Board said on March 20 that the “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.”

The standard hierarchy or framework sees equity investments classed as secondary to bonds when a bank is rescued.

The Swiss decision has led some Credit Suisse AT1 bondholders to consider legal action, and it sparked uncertainty for bondholders around the world.

“As a resolution authority in charge of the banking union resolution framework, I can tell you that I will respect fully and entirely the legal framework. So in resolution, when adopting a resolution scheme, I will respect this hierarchy starting by absorbing equity stack, and then the AT1 and then the Tier 2 and then the rest,” Laboureix said.

Switzerland is not part of the European Union and so does not fall under the region’s banking regulation.

The Single Resolution Board became operational in 2015 in the wake of the Global Financial Crisis and sovereign debt crisis. Its main function is to ensure that there’s the least possible impact on the real economy if a bank fails in the euro zone.

Since then, First Republic Bank received support from other banks and in Switzerland, authorities asked UBS to rescue Credit Suisse. Late last week, Deutsche Bank shares slid leading some to question if the German bank could be next, although analysts have stressed that its financial position looks strong.

For regulators in the euro zone, the collapse of Silicon Valley Bank, and perhaps subsequent events, could have been avoided if tougher banking rules were in place.

“A bank like this would have been under strict rules,” Laboureix said. “I’m not judging … but what I understand is that these mid-sized banks, so-called mid-sized banks in the U.S., were in reality, big banks compared to ours in the banking union.”

European lawmakers have previously told CNBC that U.S. regulators made mistakes in preventing the failure of SVB and others.

One of the key differences between the U.S. and Europe is that the former has a more relaxed set of capital rules for smaller banks.

Basel III, for instance — a set of reforms that strengthens the supervision and risk management of banks and has been developed since 2008 — applies to most European banks. But American lenders with a balance sheet below $250 billion do not have to follow them.

Despite the recent turbulence, European regulators argue the sector is strong and resilient, particularly because of the level of controls introduced since the Global Financial Crisis.

“If you look at the past events — I mean, Covid, Archegoes, Greensill, the Gilt crisis in the U.K. last September, etc, etc — during the three last years, the resilience of the European banking system was very strong based on very good solvency and very good liquidity and a very good profitability,” Laboureix said.

“I really believe that yes, there is a good resiliency in our banking system. That does not mean that we don’t have to be vigilant.”

— CNBC’s Elliot Smith contributed to this report