EU authorities express support for AT1s; Central bank dollars untouched

ECB sign sunny 9 Jun 2022
EU authorities, including the ECB, have expressed their support for AT1s. Central bank USD swap lines untouched and basis comes back.

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The EU's Single Resolution Board, the European Banking Authority and ECB Banking Supervision today welcomed the actions taken yesterday by the Swiss authorities. 


The European banking sector is "resilient, with robust levels of capital and liquidity," they stated. More interestingly, the authorities reaffirmed their support for AT1 securities and their position in banks' capital structure, even while a market repricing has knocked more than 10 points off many other banks' AT1 bonds this morning, according to Bloomberg, following the $17bn CS writedown.


    "The resolution framework implementing in the European Union the reforms recommended by the Financial Stability Board after the Great Financial Crisis has established, among others, the order according to which shareholders and creditors of a troubled bank should bear losses. 


    "In particular, common equity instruments are the first ones to absorb losses, and only after their full use would Additional Tier 1 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.  


    "Additional Tier 1 is and will remain an important component of the capital structure of European banks."


UBS shares have pared losses but remain weaker (and CDS are +2bps) and while all the banks are down,  ING is among the weakest at -5.1% (CDS +6.5bps). However, the wider Euro Stoxx 50 index of shares is +0.7%. 


In the US, First Republic shares are also off lows but -16% pre-open. The US Treasury has yet to reply to a (potentially) very expensive request by the 'Mid-Size Bank Coalition of America' over the weekend to extend FDIC insurance to all bank deposits for two years.


Finally, re-launched central bank dollar swap lines from the BOJ and BOE were untouched this morning as EUR/USD 3m cross-currency came back to -31.375bps (-1.875) after briefly widening to -42bps in early trading after getting down to around -50bps last week. Very little is trading in basis, judging by the TD SDR