Australia is unique in that mums and dad investors, not big bond funds, are the providers of bail-in capital to the banking system. That could be a problem.
and its deposit base of households is sticky, with nowhere else to go, really. As for the Swiss hybrid wipeout, our equivalent securities can’t be totally vapourised, but they can be converted to shares. We can take comfort that this has never happened.
For local banks they’re a source of incredibly cheap capital. The cash cost for a major bank to issue a hybrid is about 4.5 per cent, or less than half the return on equity given the distributions are franked. For international banks at present, the cost of AT1 capital is now higher than their return on equity.
And this is the perpetual tension for regulators that need AT1 investors to bolster the banking system. When Swiss regulators chose over the weekend to inflict $US17 billion of losses on Credit Suisse AT1 holders, the victims were big institutions such as Pimco and Algebris. Sure, some squealed and threatened legal action, but they’ve been told to suck it up and are being chastised for not properly reading the fine print.Some people think the political pressure to bail-in may be too great if the AT1 holders were all retail investors. There is precedent.
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