Home » Who pays when a bank fails: European rules and the Credit Suisse case

Who pays when a bank fails: European rules and the Credit Suisse case

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The recent difficulties of the banking system – first in the United States and then in Europe – have rekindled the interest of investors and savers on the rules for bailing out credit institutions.

Since 2016 in the European Union, the banking crisis management directive requires institutions to be reconstituted or saved with the capital of the investors themselves.

The shareholders

For this reason, even following the rules of Basel 3, the first to lose the capital are the shareholders. That is to say the owners of the credit institution themselves, who appoint the management and approve the financial statements. Shareholders are usually the first to lose their money, as happened in the United States for Silicon Valley Bank and Signature Bank, and also in Italy in recent years. For example for Carichieti, CariFerrara, Banca Marche and Banca Etruria in 2015, as well as the Veneto banks Popolare di Vicenza and Veneto Banca in 2017.

In the case of the acquisition of Credit Suisse by UBS, on the other hand, surprisingly, the Swiss institutions decided not to eliminate the shareholders’ capital, but to offer them a remuneration of almost 80 Swiss franc cents per share, compared to a price negotiated on the stock exchange until Friday of more than 1.80. A 60 percent cut, but still not a zero.

The bondholders

At the second rung of the pyramid of bank bailouts are the bondholders. That is to say, those who lend money to the bank, in exchange for an annual interest, without however becoming part of those who make decisions on the fate of the company.

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But there is obligation and obligation. The riskiest are the so-called Additional Tier 1 and 2, which when the bank issuing them is in difficulty can be transformed into shares, reinforcing the capital, or be cancelled, by transferring the capital to the institution. This occurs when a danger level is exceeded in the bank’s capital thresholds beyond which stability is put at risk. An eventuality whereby investors – only institutional ones, not forms of investment intended for small savers – are remunerated with a high yield. This category had to write off Credit Suisse’s losses of over 16 billion euros, even though the shareholders did not lose their entire capital. A possibility that would not have been feasible in the Eurozone, as the ECB, the Banking Supervisory Authority and the Single Resolution Instrument clarified in a statement.

Then there are other subordinated bonds – for example junior bonds and unsecured bonds – which guarantee less protection than ordinary bonds, the last loans to be canceled in the event of capital difficulties.

The depositories

The last called to contribute in the event of a bank bailout are the custodians. That is, anyone who has a current or deposit account at the institution. In this case there are thresholds under which deposits are guaranteed in any case. In the Eurozone this happens for less than 100,000 euros, in the United States for less than 250,000 dollars. A threshold which, however, has been waived in the US with regard to regional banks that have failed in recent weeks, to prevent customers from losing confidence in the entire American banking system.

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