The Bank of England has joined European financial regulators in reasserting that equity investors should have been at the front line in bearing the first wave of losses, ahead of holders of additional tier one (AT1) bonds. Â
In a statement today, the central bank said the UK’s bank resolution framework has a “clear” statutory order in which shareholders and creditors would bear losses in a resolution or insolvency scenario.
It added, this was the approach used for the recent resolution of SVB UK, in which all of SVB UK’s AT1 and T2 (subordinated debt) instruments were written down in full and the firm’s equity was transferred for a nominal sum of £1.
“AT1 instruments rank ahead of common equity tier 1 (CET1) and behind T2 in the hierarchy. Holders of such instruments should expect to be exposed to losses in resolution or insolvency in the order of their positions in this hierarchy,” it said.
The Bank welcomed the “comprehensive set of actions” taken yesterday by the Swiss authorities in order to ensure financial stability.
It said that “The UK banking system is well capitalised and funded and remains safe and sound.”
This follows a similar statement by the European Banking Authority (EBA), European Central Bank (ECB) and the Single Resolution Board (SRB), who tried  to stem a market rout following the Swiss regulator’s decision to wipe out $17bn in Credit Suisse’s AT1 bonds as part of UBS’ acquisition of the bank.
The regulators noted that under the EU’s resolution framework established after the global financial crisis, equity shareholders should be the first to absorb losses, with AT1 bonds only required to be written down after all CET 1 capital has been exhausted.
“This approach has been consistently applied in past cases and will continue to guide the actions of the SRB and ECB banking supervision in crisis interventions,” they said in a joint statement.
Swiss regulators worked seemingly around the clock to broker a deal which saw UBS Group $3.2 billion for the 167-year-old Credit Suisse Group and assume up to $5.4 billion in losses.
Under the deal, the Swiss regulator decided that Credit Suisse’s additional Tier 1 bonds – or AT1 bonds – with a notional value of $17 billion will be valued at zero, which angered some of the holders of the debt who thought they would be better protected than shareholders in the takeover deal.
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