Global banking system is under pressure amid row over who should lose out first when a bank struggles
The big row over Credit Suisse’s takeover centres on hierarchy: who should lose out first when a bank struggles. On the one hand, investors who bought risky AT1 bonds should expect to lose money when a bank runs into trouble.
Typically when a company goes bust, bondholders rank before shareholders in the creditor pecking order for any recoveries that can be paid. Although expecting to rank behind conventional bondholders in order of priority, owners of the AT1 bonds still thought they would place before equity investors.In the case of the Credit Suisse, bond documentation shows that Swiss regulators held the right to upend the usual hierarchy.
“The message has clearly been sent that if a bank appears to be in trouble – and the definition of trouble now includes ‘loss of confidence’ in addition to solvency and liquidity considerations – AT1 holders will immediately price in a high probability of resolution.”
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