(Oct 31): Europe’s top official for winding down failed lenders is seeking reassurances that the US won’t stand in the way of regulators elsewhere forcing bondholders to take losses when big banks fail.
Dominique Laboureix said he has recently convened a group at the Financial Stability Board (FSB) that is “working seriously” on the matter.
“In these topics, you cannot achieve 100% of comfort all around the globe with all the authorities,” Laboureix, who leads Europe’s Single Resolution Board, said in an interview. “You need to accept a certain variable of risk.”
Two and a half years after the financial system digested the collapse of Credit Suisse thanks in large part to the wipeout of investors in deeply subordinated bonds, authorities want to ensure that remains part of their play book. Yet the advent of the Trump administration has raised questions about US commitment to international standards and bodies.
“We received some good vibes,” Laboureix said when asked about feedback from new leadership at the US Securities & Exchange Commission (SEC), which is part of the FSB working group assembled a month ago.
According to Laboureix, the issue is a Great Depression-era law which allows the US to exercise “a little bit of extraterritoriality” when it comes to losses to be imposed on securities issued in the US or owned by its citizens.
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Discussions with the SEC on the topic started shortly after the 2023 collapse of Credit Suisse and “we have permanent dialog” with the Federal Reserve, Laboureix said. The Frenchman is also set to meet with the Federal Deposit Insurance Corporation and Treasury on a trip this week.
“Financial stability is a common good and I think it’s well understood by all of us,” he said.
That means banks can continue to issue additional Tier 1 capital, the type of notes wiped out at Credit Suisse, and other securities denominated in US dollars, said Laboureix.
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He also defended AT1s as having “a valid place” in banks’ wider capital reserves even as Australia’s financial regulator pushes ahead to become the first country to phase out its banks’ use of the convertible securities.
“I frequently hear that AT1s are very complex,” Laboureix said. “Yes, they are. So let’s discuss the technical features instead of deleting them.”
While European law is clear that the notes absorb losses to re-capitalise banks, authorities have asked lenders to refer to the relevant regulation in documentation for AT1 instruments, Laboureix said. That has largely taken place for traditional issuances, yet “for some complex instruments it’s more complicated,” he said.
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