EU vows to respect bondholders’ rights after Credit Suisse turmoil

A senior EU policymaker has pledged not to wrongfoot investors by upending bank creditor hierarchies, after a market uproar at Switzerland’s decision to favour shareholders over bondholders in the rescue takeover of Credit Suisse.

Dominique Laboureix, chair of the Single Resolution Board, the body in charge of shutting down failed banks, said fears that additional tier 1 (AT1) bank debt is “not investable anymore” should not apply in the EU.

Values of risky bank debt fell in Europe on Monday after Credit Suisse AT1 bondholders were left with nothing as part of a rescue deal, under which Swiss rival UBS bought the troubled lender. The decision overturned established assumptions that debt holders would be prioritised over equity holders. The bank’s shareholders received SFr3bn ($3.3bn) from UBS, while bondholders lost $17bn.

The bond market jitters led the SRB, the European Banking Authority and the European Central Bank to put out a statement stressing that common equity instruments would continue to be the first ones to absorb losses, with AT1 written down only afterwards. The Bank of England made similar remarks.

Laboureix insisted that notwithstanding the decisions in Switzerland, EU authorities would continue to stick to the established pecking order for investors. “We won’t take them by surprise,” he said.

“We should be extremely clear on this crucial element: yes indeed we want to follow this order, because it gives clarity to the investors,” he told the Financial Times in an interview. “If not, who will invest in banking issuances, if there is this possibility that each and every authority in the EU can decide whatever it wants depending on the conditions of the day?”

AT1s were introduced in the wake of the financial crisis as part of reforms aimed at reducing the risk of taxpayers being called upon to support failing banks. The securities have grown into a market worth about $260bn.

Concerns among investors following the weekend’s events were “understandable,” said Laboureix, adding that he was not criticising the Swiss authorities which were acting on specific national financial stability concerns.

The decisions in Switzerland — coupled with efforts by the US authorities to underpin confidence following the failure of two banks and to boost global dollar liquidity — showed authorities were taking the necessary steps to stabilise the markets.

“They are taking their responsibilities all over the globe — that’s extremely good in terms of financial stability,” said Laboureix, who was appointed to the SRB in November 2022. He previously held the position of secretary-general of the French Prudential Supervisory Authority.

The SRB, which began operations in 2015, was one of the institutions that sprang out from European capitals’ efforts to prevent a rerun of the financial crisis. It has responsibility for ensuring that a failure of one financial institution does not spread turmoil throughout the banking system.

Brussels has been working on draft legislation on crisis management that would ensure a more consistent treatment of lenders that get into trouble, reducing the risk of drawing on public funds.

Policymakers including Paschal Donohoe, president of the eurogroup of finance ministers, have called for this legislation to be advanced soon, but the proposals will be contentious among member states.

The draft coming from the European Commission would be “balanced”, Laboureix said. “It’s about giving more confidence and credibility to our resolution and, more broadly, crisis-management framework in Europe. And this matters.”