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European supervisors say shares should be wiped out before bonds

european flags are seen in front of the ecb building, in frankfurt
Signage is seen outside the European Central Bank building in Frankfurt, Germany

European supervisors tried to stop a rout in the market for convertible bank bonds on Monday, saying owners of this type of debt would only suffer losses after shareholders have been wiped out – unlike what happened at Credit Suisse (CSGN.S).

The European Banking Authority, European Central Bank and the Single Resolution Board and were reacting to a decision by Swiss authorities to write off Credit Suisse’s Additional Tier 1 bonds even as stockholders received shares in UBS (UBSG.S).

The three European regulators – respectively responsible for writing the rules, applying them and winding down failing banks – said they would continue to impose losses on shareholders before bondholders.

“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 statement.

“Additional Tier 1 is and will remain an important component of the capital structure of European banks,” they added.

The supervisors welcomed, however, “the comprehensive set of actions taken yesterday by the Swiss authorities” to save Credit Suisse.

In a package engineered by Swiss regulators on Sunday, UBS Group AG will pay 3 billion Swiss francs ($3.23 billion) for 167-year-old Credit Suisse Group AG 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, angering some of the holders of the debt who thought they would be better protected than shareholders in the takeover deal announced on Sunday.

AT1 became popular with banks and market participants in the past decade as lenders looked for ways of building up capital to meet supervisors’ requirements without issuing equity.

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