Lu Yixuan/Nuclear Bomb-Level Financial Crisis: What Legal Issues Does Credit Suisse Have? What should Taiwan pay attention to? | Legal vernacular PLM | Current affairs observation

2023-04-17 03:13:21

Following the collapse of Silicon Valley Bank, Credit Suisse was exposed to a greater financial crisis…

Since the end of March this year (2023), plots comparable to novels have occurred in the American financial circle one after another. Different news is reported every day, which is dazzling.

Originally, everyone thought that the collapse of Silicon Valley Bank (SVB) was earth-shattering enough, and my country’s financial industry also had limited exposure, so Taiwan seemed to be safe.

Unexpectedly, Credit Suisse was subsequently exposed to a biggerFinancial Crisis, The level of impact on our country is far greater than the collapse of SVB Bank. This is because SVB is more focused on new innovations in Silicon Valley, and is not deeply involved in my country’s financial industry; but Credit Suisse is different.

This bank was once one of the dream foreign businessmen of our country’s business management department. Not only is it an important institution in the global financial system, but it is also regarded as one of the 30 “too big to fail” banks in the world!

All this shows that the survival and financial status of Credit Suisse will deeply affect the global financial system. What exactly happened to Credit Suisse and what impact it will have, I will quickly analyze it for you in a few minutes.

What the hell happened to Credit Suisse?

Before Credit Suisse broke out in this year’s crisis, its image has plummeted in recent years. It has been involved in various financing company bankruptcy cases and hedge fund liquidation incidents, with a loss of nearly 15 billion US dollars. It has also been involved in transnational money laundering cases wait for the scandal1

Under this series of blows, Credit Suisse’s customer loss accelerated in the fourth quarter of last year, with a total outflow of more than 120 billion U.S. dollars, causing the bank to violate some of the “Liquidity buffers” (Liquidity buffers) regulations2and then around October of the same year, a financial crisis broke out.

A few days after Silicon Valley Bank declared its bankruptcy, Credit Suisse disclosed in its 2022 annual report: Due to the material weakness in the financial reports of the past two years, it can be seen that Credit Suisse’s internal control mechanism for financial reports has failed; in this regard, The audit agency even gave an “adverse opinion”.

Photo / Associated Press

Facing all kinds of warning signs, the Swiss government hastened to save this “formerly Swiss pride.” Not only did they try their best to use the fastest speed through emergency procedures to get Swiss banks to buy Credit Suisse at a discount of 40% off the market price; the Swiss National Bank also promised to provide a liquidity assistance loan of up to 100 billion Swiss francs, which made this matter seem to be possible. the end.

Incidentally, because of this massive rescue operation, the Swiss government has also been dubbed the “financial banana republic” by public opinion. “Banana republic” is usually used to jokingly refer to some kind of bad political and economic system, especially those with extensive financial resources. A country with corruption and powerful external forces intervening in the government system.

according to”Business weekly“Reported that the reason why the word banana was crowned was that in the 1860s, after the American Civil War, bananas gradually became popular with Americans, and American businessmen began to open up land and grow bananas in Central and South America. The prosperity of this industry has made the United States begin to want to control countries such as Central and South America, and slowly began to have the aforementioned titles.

AT1 Bonds turned into wallpaper? What is this?

In news articles about the Credit Suisse crisis, Credit Suisse’s debt is often tied to a bond called “AT1”. And from the news headlines, we can see that this kind of bond is about to become a “wallpaper”! What is the origin of this?

As the name suggests, AT1 is a bond, but it is not an ordinary bond, but a convertible bond.

The meaning of convertible bonds means that this kind of bonds have the characteristics of conversion. When certain conditions occur, the bonds can be converted into stocks, depending on the conditions set in the original issuance of the bonds.

AT1 is commonly known as “CoCo Bond” (Contingent Convertible Bonds), also known as emergency convertible bonds. When the bank’s capital level is below the legal minimum level, the bank can choose to convert this bond into common stock, which is the concept of converting creditors into shareholders.

Because if you are a creditor of the bank, the bank theoretically has to pay you back. But assuming you are just a shareholder, the bank doesn’t have to pay you back. Therefore, AT1 bonds have the characteristics of helping banks “absorb losses”.

As for why everyone buys, apart from the fact that the yield of this bond is much higher than that of ordinary bonds, to some extent, it is also because the capital level of Credit Suisse will not be lower than the minimum requirements of the regulations; simply put, it is to believe it Nothing will happen.

In news articles about the Credit Suisse crisis, Credit Suisse’s debt is often tied to a bond called “AT1”. …

The Root Cause of Wallpaperification: Write-down Write-offs

However, the AT1 issued by some banks does not only have the loss-absorbing method of “converting into common shares”, but also records another more powerful method, which is “write-down and cancellation”.

To put it bluntly, even shareholders don’t let you be, just let these bonds become wallpapers, as if these debts don’t exist in the bank.

Like this time, the Swiss financial regulator (FINMA) intends to “completely write down” AT1 totaling approximately US$17.3 billion in order to increase core capital. In other words, the creditors of Credit Suisse’s AT1 bonds did not become shareholders of ordinary shares in this incident, but were directly “written off”—undoubtedly turned into wallpaper.

However, European regulators pointed out that this is not in line with the practice in the financial circle, because theoretically existing shareholders should have priority bondholders (creditors) to bear the losses.

It means that if a company has a problem, in principle, the creditors will be paid first, and if there are any leftovers, it will be the turn of the shareholders (creditors>shareholders>nothing). In other words, even if the bondholders of AT1 are converted into shareholders, there is still a little hope that they can get their money back; but if the competent authority chooses to cancel, it will really return everything to zero.

Therefore, the actions of the Swiss regulatory authorities this time have made creditors’ interests inferior to those of shareholders, and should only be regarded as a special case3

Therefore, there are also many AT1 bondholders who believe that the actions of the Swiss regulatory authorities are simply illegal, and there may be related legal disputes in the future; after all, 17.3 billion US dollars is not a small amount, and it is hard to imagine that these bondholders will silent.

Back in Taiwan, according to the statistics of the Financial Supervisory Commission, although my country’s financial institutions have exposures of up to 155.6 billion yuan to Credit Suisse, at least they have not purchased AT1 bonds. However, Chinese banks still sell high-yield bonds to investors, with a scale of about 1.8 billion yuan.

However, according to the Financial Regulatory Commission, the current domestic holders of AT1 bonds, except for domestic investment trust funds, are in principle professional investors or high-net-worth asset clients. people, or rich people.

Compared with ordinary retail investors, these people obviously have a higher ability to identify and tolerate risks, so the competent authorities have allowed them to purchase these higher-risk bonds.

Huang Tianmu, chairman of the FSC, recently pointed out that most financial institutions in Taiwan did not invest in AT1 bonds after investigation. Picture/United…

Does Taiwan have the corresponding crisis response capacity?

Because of the aforementioned turmoil, the public began to pay attention to the stability of my country’s banking system. It is also necessary to know the concept of the so-called “systemically important banks”.

simply put,this refers toLarge-scale, complex business, and highly related to the normal operation of the overall financial system, or provide financial services that are irreplaceable for the financial system.

Once a major risk event occurs to such banks, it will have a negative impact on the overall financial system or economic activities, and may lead to further deterioration or spread of the crisis.

In my country, six banks are designated as systemically important banks: China Trust Commercial Bank, Taipei Fubon Commercial Bank, Cathay United Bank, Cooperative Treasury Commercial Bank, Mega International Commercial Bank, and First Commercial Bank.

For these banks,regulatory authorityNot only do they have relatively high capital adequacy requirements, but they are also required to set aside a certain amount of statutory capital on average every year to cope with possible financial risks.

Before the end of August 2021, these six banks have reported to the Financial Supervisory Commission “business crisis response measures”, commonly known as “living contracts”. That is, if the bank encounters major problems, including liquidity crisis, insufficient capital to bear risks, etc., how should the bank deal with these situations to reduce the impact on other financial institutions.

In addition, the FSC announced in 2008 the “Key Points for Dealing with Operational Crisis of Financial Institutions“, has also been re-examined by everyone, and it seems out of date to be questioned. Because from the announcement to the present, the gist has never been updated. In this regard, Huang Tianmu, chairman of the Financial Supervisory Commission, also responded that this part has asked the Banking Bureau to discuss and amend the law, and more new types of institutions will be included in the regulations.

Summary: Pay attention to risks, investment should not be blindly optimistic

In the face of turmoil in the general environment, although investors don’t have to blindly look at the bad, they can’t bury their heads in the quilt and be blindly optimistic. Roubini, known as a doomsday scientist, said bluntly: Credit Suisse is too big to fail, but it is also too big to save. He believes that even if Credit Suisse is rescued by Swiss banks, it may not have good results.

And Credit Suisse’s every move will affect the European financial system, and will even affect the global economy. As nanometer investors, in addition to paying attention to whether the corresponding laws and regulations in our country are perfect and supervising them, we should also check whether our investment positions are related to each other, diversify risks as much as possible, and do a good job in asset allocation. After all, in the investment market, making money is not absolute, survival is what matters.

Figure/United Daily News Department Information Photo
  • Text: Lu Yixuan, a lawyer who passed the college entrance examination, is currently studying at the Graduate School of Finance and Law of Taipei University. Determined to become a gourmet who does not do business properly, with a built-in food radar in his head, his hobbies are eating and thinking about legal issues.
  • More:FBIGWeb

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