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Europe will pay the price for wiping out Credit Suisse bondholders as its ex-CEO warns U.S. banks are ‘rubbing their hands’

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Summary

The former CEO of Credit Suisse argued that Swiss authorities forcing full losses on certain bondholders of the failed lender will make life more difficult for European banks since it went against the traditional hierarchy of stock owners being the first to take a hit. This precedent could push up funding costs for European banks, making them less competitive compared to U.S. and Asian rivals. Bondholders are considering taking legal action and the cost for credit default swaps have already risen in reflection of the jitters around AT1 bonds. European banking regulators have clarified that in the euro zone common shareholders would always be the first to get wiped out before any AT1 bondholders would take a hit.

Q&As

What was the decision made by Swiss authorities regarding Credit Suisse bondholders?
The decision made by Swiss authorities was to impose full losses on certain bondholders of failed lender Credit Suisse.

What impact could this decision have on European banks?
This decision could raise the cost of capital for Swiss banks and European banks, making life more difficult for them going forward.

What is the role of Additional Tier 1 bonds in the banking system?
Additional Tier 1 bonds are a financial instrument created to make lenders more resilient without cutting off the supply of credit to the real economy.

What have European regulators said about the cost of capital for banks in the Eurozone?
European regulators have said that in the Eurozone common shareholders would always be the first to get wiped out before any AT1 bondholders would take a hit.

What did Citigroup CEO Jane Fraser have to say about the clarification from European regulators?
Citigroup CEO Jane Fraser said she was relieved when the clarification came out, as it took people by surprise.

AI Comments

👍 This article provides a great overview of the complicated financial landscape and the implications of the Credit Suisse decision for European banks.

👎 This article fails to provide an adequate explanation for the potential legal actions that affected bondholders may take.

AI Discussion

Me: It talks about the Swiss authorities imposing full losses on certain bondholders of Credit Suisse, which could lead to higher funding costs for European banks. Former CEO Tidjane Thiam warns that this could put European banks at a disadvantage compared to their U.S. counterparts.

Friend: Wow, that's pretty significant. Do you think this will really affect European banks?

Me: Yes, it seems likely that it will. Bondholders may start demanding a higher return on their investments, which could make it more expensive for European banks to borrow. In addition, the market is already pricing in higher capital costs for European banks, and other banks like Deutsche Bank have been selling off hard. This could have a negative impact on the competitiveness of the European banking sector.

Action items

Research the Basel III regulatory regime and understand the implications of AT1 bonds for European banks.
Monitor the stock prices of European banks to gauge the impact of the Credit Suisse decision on their competitiveness.
Stay informed of any legal action taken by affected bondholders and the potential implications for the banking industry.

Technical terms

Credit Suisse: A Swiss multinational investment bank and financial services company.
Additional Tier 1 (AT1) bonds: A type of debt instrument that is subordinated to other debt instruments and is used to strengthen a bank's capital base.
Common Equity Tier 1 (CET1): A measure of a bank's core capital, which is the most reliable form of capital for a bank.
Contingently convertible (CoCo) debt: A type of debt instrument that can be converted into equity or written off in the event of a bank's insolvency.
Basel III: A set of international banking regulations that were developed by the Basel Committee on Banking Supervision to strengthen the regulation, supervision and risk management of banks.
Consumer Confidence: A measure of how optimistic or pessimistic consumers are about the economy.
UFB Direct Savings Account: A type of savings account offered by UFB Direct that offers an annual percentage yield (APY) above 5% with no fees.