[noemon]

The Bank of England has attempted to reassure debt investors after the rescue of Credit Suisse triggered heavy losses and stoked fears of collateral damage to other banks.

Threadneedle Street and the European Central Bank both spoke out on Monday against the decision by Switzerland’s financial regulator to favour shareholders over bondholders in the deeply discounted sale of Credit Suisse to UBS.

Owners of $17bn (£13.9bn) of a type of bonds known as AT1s had their investments written down to zero in the hastily negotiated takeover, which was brokered by Swiss officials. It had been assumed that shareholders would be wiped out first but UBS agreed to pay $3.25bn for the equity.

In a joint statement, the ECB, the Single Resolution Board and the European Banking Authority said the Swiss had not followed the bailout hierarchy established after the financial crisis.

They said: “In particular, common equity instruments [shareholders] are the first ones to absorb losses, and only after their full use would AT1s be required to be written down.

“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. AT1 is and will remain an important component of the capital structure of European banks.”

The Bank of England also said that bank shareholders should bear losses ahead of bondholders in the event of a bank failure.

A spokesman for the Bank said: “Holders of such instruments should expect to be exposed to losses in resolution or insolvency in the order of their positions in this hierarchy.”

The unusual rebuke from Brussels and the Bank of England highlights the degree of concern among regulators that the fallout from Credit Suisse could continue.

International authorities acted on fears that the Swiss treatment of AT1s could undermine their wider use and cut off a crucial source of $275bn of funding for European banks. Bonds issued by other European lenders had plunged on concerns that other countries could repeat what happened in Switzerland.

Investors were last night considering legal action. Quinn Emanuel, a US law firm, said it was in talks with several Credit Suisse investors “representing a significant percentage” of the total notional value of the AT1s.

The bonds were introduced in the wake of the 2008 financial crisis as a mechanism to allow banks to be bailed out by investors, rather than taxpayers, in a crisis.

They are also known as CoCos, short for contingent convertibles, because they convert from debt into equity when a bank hits trouble. The mechanism should provide an automatic capital cushion for troubled lenders.

Despite the crisis, Credit Suisse told staff on Monday that it will deliver bonuses and pay rises as planned this year.

It came as shares in US bank First Republic plunged by as much as 50pc again on Monday after its credit rating was cut for the second time in a week.

JP Morgan chief Jamie Dimon was reportedly spearheading talks for a new rescue package for the embattled lender as the crisis among US regional banks rumbled on.

A group of Wall Street banks, including JP Morgan, last week clubbed together to provide $30bn to First Republic.

Meanwhile, Rishi Sunak moved to reassure investors that the UK’s banking system remained safe from contagion.

A Downing Street spokesman said: “We do believe we have a robust system, a strong system,” adding that UK banks are “safe and well-capitalised”.

Shares in London-listed banks and oil companies slumped again following the announcement of UBS’ takeover of Credit Suisse, with Standard Chartered and Barclays sliding 3pc and 2.3pc respectively, making them the two biggest fallers on the FTSE 100.

Gold also rose above $2,000 an ounce for the first time in more than a year after the banking crises in the US and Europe triggered a return to haven buying.

Following the announcement of the deal, UBS's five-year credit default swap spreads – an indicator of the likelihood that a borrower will pay its debts as they fall due – rose 24 basis points to 156. They were at 78 basis points a week ago.

The higher the CDS value, the greater the premium that an investor must pay to insure themselves against the default of the underlying asset

The value of UBS’s riskiest debt also plummeted. UBS debt yields, equivalent to an interest rate that the bank would have to pay, hit nearly 17pc.

Shareholders go first, customers of financial products like bonds go second, customers of interest-paying saving accounts should go third, while fee-paying customers of checking accounts are last in the hierarchy and certainly much less to blame than the regulators themselves who are allowing their money to be risked with without any return to them.

This last group strips away all the pretense of the current financial system:

When you deposit money in your savings account, your bank can use an amount specified as capital to fund loans and pay you for using your money. For instance, say you deposited $2,000 in a savings account. Savings accounts pay interest—generally between 0.5% and 2%—so you receive an interest payment on your money, and the bank can use part of it in a loan. In turn, the bank might want to access 80% of your money to use as loans to other customers.

The fractional reserve banking has been established on this very justification, the bank accesses your money in return for interest or something. That is the only justification it has to access your money. That is the only justification for any sort of fiduciary activity, something in exchange for something else.

Today, people have lost track of this very basic thing as various PoFoers, youtubers and twitterati very clearly demonstrate and accept things just because they are what they are. People are outraged by a whole bunch of things, like people accessing their own money, but are not outraged by the fact that the banks under the instructions & regulations of the Central Banks/FED are not even pretending to literally steal your money anymore with no material benefit for you but all the liability on you, the capital provider.

The Central Banks/FED have diluted all regulations, to include all depositors in the same soup and people are happy to go along with it.

[JohnRawls]

Shareholders go first, customers of financial products like bonds go second, customers of interest-paying saving accounts should go third, while fee-paying customers of checking accounts are last in the hierarchy and certainly much less to blame than the regulators themselves who are allowing their money to be risked with without any return to them.

This last group strips away all the pretense of the current financial system:



The fractional reserve banking has been established on this very justification, the bank accesses your money in return for interest or something. That is the only justification it has to access your money. That is the only justification for any sort of fiduciary activity, something in exchange for something else.

Today, people have lost track of this very basic thing as various PoFoers, youtubers and twitterati very clearly demonstrate and accept things just because they are what they are. People are outraged by a whole bunch of things, like people accessing their own money, but are not outraged by the fact that the banks under the instructions & regulations of the Central Banks/FED are not even pretending to literally steal your money anymore with no material benefit for you but all the liability on you, the capital provider.

The Central Banks/FED have diluted all regulations, to include all depositors in the same soup and people are happy to go along with it.

Switzerland should be sanctioned by US and EU for this. Cut them off from our financial markets and banking sector.

[ness31]

Noemon have you ever read the fine print on any of your banking stuff? Seriously mate, they’re criminals from top to toe that have figured out how to steal from you in the afterlife.

[noemon]

Seriously mate, they’re criminals from top to toe that have figured out how to steal from you in the afterlife.

And you 're absolutely happy with that, eh?

[Rugoz]

The Telegraph with a quality article, as usual .

Credit Suisse’s contingent convertible (CoCo) bonds contained explicit language allowing regulators to write them down without first wiping out shareholders.

https://www.risk.net/regulation/7956301 ... e-ubs-deal

And let's not pretend that wasn't known to those who bought them (hint: not retail investors).

[noemon]

The Telegraph with a quality article, as usual .

Indeed, and there is more where that came from.

Saving Credit Suisse is a total calamity for the Swiss – and maybe the world

Have officials just created a bank that is 'even more too big to fail'?

When it comes to motivational speeches, UBS chairman Colm Kelleher has set a new bar.

On Sunday evening, as the ink was drying on the bank’s government-enforced takeover of doomed arch-rival Credit Suisse, Kelleher attempted to offer some reassuring words.

UBS senior bosses were “aware that the coming weeks and months will be difficult for many”, he said, before admitting in the next breath that it was “too early to say” what will happen.

It was as unconvincing as efforts by the Credit Suisse press office to save face by describing the rescue deal as a merger when their counterparts at UBS had correctly called it a takeover.

Kelleher had gone further: “Let us be clear ... this is an emergency rescue,” he said. Others have called it a bailout.

The Swiss press had already made up their minds anyway. The Tages-Anzeiger newspaper called it a “historic scandal”. Another major newspaper carried a drawing of the Credit Suisse headquarters in flames.

The market reaction wasn’t much better. Shares in UBS plunged as much as 12pc in early trading and the cost of insuring its debts against default spiked, while Credit Suisse suffered the final ignominy of seeing its shares become a penny stock after crashing 60pc.

There was also a global sell-off in bank bonds after it emerged that junior bondholders would be wiped out as part of the merger, while Credit Suisse shareholders would get some compensation, in apparent contravention of bank bailout rules.

Only the intervention of the European Central Bank and the Bank of England with a promise to uphold the hierarchy in future restored some calm but the atmosphere remained febrile.

The best that can be said for events at this stage is that it appears to have averted a full-blown banking crisis.

However, the same was said about the decision of the Swiss central bank to provide an emergency £45bn loan to Credit Suisse last Thursday, and that thesis proved to be spectacularly wrong.

The following day Credit Suisse clients withdrew a record £10bn from their accounts, forcing the Swiss government to hurriedly force through a rescue deal before the markets opened on Monday morning.

So why anyone would listen to the architects of this disastrous shotgun marriage is a mystery.

Big deals have a history of blowing up in dramatic fashion, therefore the prospects for a rushed union involving the sick man of European banking are grave.

It could turn out to be a disaster for all and sundry.

There is obviously something to be said for preventing the financial system unravelling. As Swiss finance minister Karin Keller-Sutter put it: “Bankruptcy would have had a huge collateral damage – on the Swiss financial market ... and also internationally.”

But at the same time, how good is it for global confidence that a systemically important bank came so close to the brink? The parallels with the financial crash of a decade and half ago are immediate, and the costs of saving Credit Suisse will still be astronomical.

The idea that UBS is “upholding the reputation of the Swiss financial centre”, as chief Ralph Hamers claims, is laughable. On the contrary, it is a total calamity for Swiss banking, the Swiss establishment and the country as a whole.

A UBS-led takeover was obviously preferable to allowing Credit Suisse to go under but in order to convince UBS to play saviour, the Swiss state and central bank have had to provide a staggering £230bn of emergency liquidity and loans – equivalent to more than a third of the country’s gross domestic product.

Presumably, a third option of nationalising Credit Suisse would have been even more eye-watering.

Voters will surely want to know why such vast sums of taxpayer money are being spent propping up a scandal-ridden institution, and why Swiss authorities did so little to prevent it from spiralling out of control.

A decision to pay staff bonuses in full will feel like the final insult.

Similarly, whoever’s idea it was to wipe out bondholders in order to protect shareholders, contrary to what investors understood the rules to be, will surely live to regret it.

That ruling alone could destroy Switzerland's standing as an international financial centre, and it could mean some lengthy and ultimately very costly legal action is brought by those who have lost money.

There’s little in it for Credit Suisse, either.

Yes, it restores some “stability and security for clients”, as Hamers puts it, but he’s frantically scraping the barrel.

It is the end of the bank as we know it – a 167-year-old giant of European banking and one of Switzerland’s most storied institutions – gone in the space of just a few frantic hours.

Even the City of London must bear some of the pain, with thousands of jobs expected to go from a combined workforce of 11,000.

The suggestion that UBS stands to be the big, or perhaps only, winner, seems just as flawed.

A common misconception of big mergers is that one plus one equals two. Yet as the Swiss newspaper Neue Zurcher Zeitung points out, the risk is that officials inadvertently create a bank that is “even more too big to fail” – “a zombie that becomes a monster”.

It comes with “significant execution risk, litigation risk ... and management focus will be captured by this deal for many quarters, maybe years”, Jefferies analysts argue.

There is also a big question about what happens to the remaining deposit base “in the light of material outflows over the last few days”, JP Morgan adds.

Even Switzerland’s decision to foot the bulk of the bill doesn’t justify premature talk from some excitable commentators about the “deal of century”. If that prediction proves to be correct, it will be for all the wrong reasons.

[ness31]

Words cannot express how much I hate the finance sector for its trickery and predatory nature. I’m just trying to detangle some of the jargon but it’s making my blood pressure soar.

Bail in Bonds or Unsecured Bonds really shouldn’t exist. Another financial product that means nothing, is backed by nothing and is based on a dishonest psychology. May as well put an IOU in a jar written in texter.

[Potemkin]

Words cannot express how much I hate the finance sector for its trickery and predatory nature. I’m just trying to detangle some of the jargon but it’s making my blood pressure soar.

Bail in Bonds or Unsecured Bonds really shouldn’t exist. Another financial product that means nothing, is backed by nothing and is based on a dishonest psychology. May as well put an IOU in a jar written in texter.

But that’s essentially what the entire banking system has always been based on, @ness31. An IOU scribbled on a scrap of paper and stuffed in a jar. Everything else is just IT and jargon.

[ness31]

But that’s essentially what the entire banking system has always been based on, @ness31. An IOU scribbled on a scrap of paper and stuffed in a jar. Everything else is just IT and jargon.

You’re right.

My next step is to figure out why this type IOU is so much worse than your regular deposit IOU and I’m not sure I want to dedicate myself to that endeavor or if indeed I will even detect a difference.

Do you remember that movie The Laundromat? I just don’t want to become Meryl Streep today, I got shit to do..

[Rugoz]

Indeed, and there is more where that came from.

What is it with British newspapers? Although FT is also British, read that one.

As usual with these bailouts, I don't expect the taxpayer to lose any money. CreditSuisse wasn't worthless, rather it experienced a crisis of confidence after years of losses and mismanagement.

[noemon]

The Telegraph and the Daily Fail are the voice of real Britain.

The only way to know what the Brits are truly thinking.

I read them all.

[Potemkin]

The Telegraph and the Daily Fail are the voice of real Britain.

The only way to know what the Brits are truly thinking.

I read them all.

The horrifying truth is in there for all to read, @noemon. No-one can say that we hide what we are. Lol.