The collapse of three US banks last week has accelerated Credit Suisse liquidity crisis. But what about contagion to other European banks and the European and global banking system as a whole? This note is a summary of the analysis by Jérémie Boudinet, Head of Investment Grade Credit.
BACKGROUND
Over the past several years, Credit Suisse has been involved in several high-profile scandals raising questions about its corporate governance practices and overall corporate culture. Considering this situation, we excluded Credit Suisse from our open-end or dedicated funds due to its history of major operational incidents and business controversies, which revealed weaknesses in its risk management. While these incidents differ in nature and impact, their accumulation suggests that structural problems persist within the company.
WHAT has happened since 19 March 2023?
On 19 March, all of the above, as well as the stress experienced by the bank in recent days, particularly following the failure of the US regional banks, led FINMA to approve the acquisition of Credit Suisse by UBS. The deal resulted in the purchase of the bank for CHF 0.76 per share, or a total of CHF 3 billion. Unfortunately, AT1 holders were hit hard by this decision, as the value of their securities fell to zero.
What is surprising and precedent-setting here is the failure of creditor hierarchy against shareholder. In contrast to the shareholders, the holders of Credit Suisse's AT1 CoCos (CHF 15.8 bn) will see their securities fully written-off. The T2 CoCos (CHF 1.5 bn) will be spared, as will the senior bonds of HoldCo and OpCo.
It should be noted that AT1 instruments with "permanent write-down" now offer less protection than "temporary write-down" or “equity conversion" notes.
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