By Scott Kanowsky
Investing.com -- Euro zone regulators have backed the current hierarchy of debt if a bank in the region fails, as they look to soothe market jitters that partly stem from a decision by Swiss authorities to write off a riskier class of bonds in Credit Suisse Group AG (SIX:CSGN).
In a joint statement, the EU's Single Resolution Board, the European Banking Authority, and ECB Banking Supervision said they "welcomed" the move by their Swiss counterparts, saying it helps "ensure financial stability."
The Swiss financial regulator Finma ordered that $17 billion worth of so-called Additional Tier 1 debt in Credit Suisse be wiped out as part of the troubled lender's government-brokered merger with larger rival UBS Group AG (SIX:UBSG) over the weekend. Credit Suisse shareholders, however, will still receive some compensation for their stock.
European bank stocks and bonds opened sharply lower on Monday after the announcement surprised investors and cast doubt over a large part of the market for bank bonds.
In a bid to assuage these concerns, the euro zone authorities said that equity holders will take losses before owners of AT1 debt in the event of a bank failure.
"In particular, common equity instruments are the first ones to absorb losses, and only after their full use would Additional Tier One 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," they noted.
"Additional Tier 1 is and will remain an important component of the capital structure of European banks."
The authorities added that the European banking sector remains "resilient, with robust levels of capital and liquidity."