Abhishek Lingwal, CFA’s Post

Upside down: when AT1 instruments absorb losses before equity ➡ As demonstrated by the recent Credit Suisse episode, outside resolution, some Additional Tier 1 (#AT1) bonds may be written down entirely before the wipe-out of Common Equity Tier 1 (#CET1). This situation implies a transfer of value from holders of such AT1 bonds to shareholders. ➡ While the isolated write-down is feasible in many jurisdictions, unintended consequences associated with the use of this mechanism may lead authorities to only write down these bonds in resolution. This would effectively deprive them of their ability to absorb losses on a going-concern basis. ➡ Since the #AT1 instruments were conceived for the purpose of absorbing losses on a going-concern basis, there may be merit in considering whether the current design of AT1 instruments remains fit for purpose or whether adjustments to the regulatory framework might be necessary. ➡ In addition, given the potential for market misperceptions regarding the functioning of AT1 bonds, authorities may wish to consider whether there is merit in pursuing regulatory work aimed at increasing the transparency and disclosure of AT1 instruments' characteristics. #AT1 #BIS #CRR #BRRD #CET1 Partner in Compliance https://lnkd.in/e7QBfx8k

Incredible important discussion. How are liabilities covered in the resolution case. It’s not trivial in a scenario of liquidity contraction. Personally, I see covered bonds especially as #SRT as the relevant instruments. Send me a message, with you thoughts - or even better share…

UBS AT1 Bonds yield premia vanish to align to non-Swiss issuers bond yields.  It is a reflection of investors’ expectation that Swiss Authorities will not recur again to an isolated writedown of AT1 instruments using the “qualitative” non viability trigger. An isolated writedown of AT1 instruments is possible in jurisdictions such as EU, United Kingdom, Switzerland and Japan under a “quantitative” trigger. However, the CS acquisition from UBS was structured as a “commercial transaction” outside the scope of a resolution framework, thus creating an unwanted transfer of value from AT1 bondholders to shareholders.

Why, when and how can AT1 instruments be written-down before equity? Is the Swiss approach with CS so unique? This new FSI Briefs compares practices across jurisdictions and extracts policy conclusions. https://lnkd.in/eUdKgEgV

In these circumstances, the bank that wants to do the off-balance-sheet transaction will engage in an “asset swap” with an institutional investor, whereby the bank gives the investor low-rated securities in exchange for highly rated securities such as Treasury notes. The bank promises to reverse the transaction at a later date so the institutional investor can get its Treasury notes back. Once the bank has the Treasury notes, it can pledge them to the derivatives counterparty as “good collateral” and enter into the trade, thus earning high returns off balance sheet with scant capital required. As a result of the asset swap, a two-party trade turns into a three-party trade, with more promises involved, and a more complex web of reciprocal obligations involving banks and nonbank investors. #bank #treasury #institutionalinvestors

Recent banking crises have put a spotlight on contingent convertible (CoCo) bonds and the need to understand the risks around these complex instruments. In this article, Loic Tudela and Allan Cowan compare the results of three different modeling methods of contingent convertible bonds under stress scenarios. Read here: https://ow.ly/E1r350Q9vbG #riskmanagement #cocobonds #riskscenarios #convertiblebonds

Initial margin serves a crucial role in mitigating gap risk between counterparties in financial transactions. Banks traditionally require "high quality" collateral, such as well-rated sovereign bonds, for initial margin. However, despite being classified as high-quality assets, sovereign bonds (HQLA level 1) may not provide better protection against gap risk compared to Equities. This is due to regulatory minimum haircuts set by regulators, Equities have shown comparable or lower risk of not covering a 10-day gap, than many sovereign bonds like the 30-year German Treasuries (observation period January 2009 to today). The implications are significant. By potentially accepting Equities as collateral in initial margin agreements, banks can manage gap risk without increasing their counterparty credit risk. The decision of accepting collateral should be based on the correlation between the counterparty's credit risk and the collateral's value. For instance, if a counterparty, such as a pension fund, has large exposure to increasing rates, Equities may offer a more prudent choice for initial margin collateral than sovereign bonds. Ultimately, embracing Equities as collateral could lead to reduced funding costs for both parties involved, and possibly even reduce the risk that either counterparty is found out of pocket upon default of the other. #initialmargin, #financing, #BaselRules

Call Me (Early) Maybe? The Global AT1 Hot Streak Continues.   Over the past 6 months, global additional tier 1 (AT1) securities have strongly outperformed, recovering off the lows from the collapse of Credit Suisse back in March 2023.   More recently, the strength of the global AT1 market has been supported by global banks calling/redeeming their bonds on the first call date and even engaging in liability management exercises to tender bonds early (and at a premium).   Yesterday, both Spanish bank Santander and Austrian bank Erste announced the tender of their bonds, more than 10 months ahead of their first call dates. These bonds are being tendered at par (€100.0) which is at a 2-3% premium and a cherry on top of the 4-5% capital price appreciation already achieved year to date (chart 1).   As chart 2 shows, these types of opportunities remain as there continue to be a decent sub-set of AT1’s that are trading at a discount to par and are up for call over the next 2 years. #fixedincome #bonds #credit #investments #markets

#Barclays and #DeutscheBank are among banks using #synthetic trades to get #capital #relief. Europe is leading the charge in part because of banks’ high cost of equity. Sound scary? Well this kind of loss insurance is much simpler and stronger than in the past. One of the biggest changes is that most deals are funded up front making it much less likely that your insurer can’t or won’t pay. Still there are risks… read more Bloomberg Opinion >> Banks Are Back Into Credit Derivatives. Stay Calm. https://lnkd.in/eG7NUkTz

It's a #synthetic risk transfer to game the #capital rules! But it's new, improved and has a fresh citrus scent! Who is buying the risk and how are they financing it? How concentrated are the exposures? Risk doesn't go away it just moves around. #creditrisk