Swiss Financial Market Supervisory Authority (SFSA), which supervises banks, securities and insurance markets, has taken a leaf out of Reserve Bank of India's template of bailing out private sector lender Yes Bank three years ago.
The RBI under Governor Shaktikanta Das had rescued the new-generation private bank promoted by a banking professional Rana Kapoor without any cost to the exchequer or the RBI.
The restructuring plan of the bank that failed because of reckless lending was unique as it meant first writing down the bank's Additional Tier 1 Bonds (AT1) valuing Rs 8,400 crore to zero.
This move was controversial as the equity value of private bank should have been written down to zero first, before the AT1 bonds, as they were ahead in the pecking order. The bondholders of Yes Bank were already fighting a legal battle against the RBI in the Supreme Court.
The equity was, however, diluted a bit as half a dozen banks, led by the State Bank of India (SBI), came to the rescue by pumping in additional equity capital. The equity capital increased 6 times from 1,000 crore plus to Rs 6,000 crore. Following which, the SBI became the largest shareholder owning 26 per cent in Yes Bank.
But the bondholders were left high and dry.
Three years later, SFSA followed the RBI template by handing over failed Credit Suisse bank in a $3 billion deal to UBS AG, the biggest Swiss bank, by writing down the entire AT1 bonds worth $17.3 billion.
AT1 bonds, used globally to raise capital, are usually perpetual in nature with high returns as compared to other bonds.
The decision of the global regulator on writing down the AT1 bonds will have far reaching implications. In fact, the investors will now not come forward to park their surplus funds in these risky bonds. “We will see higher risk premiums in these bonds, which would mean higher interest rates,” says a market player.
The story at another failed bank - Signature Bank - has seen US regulators following a different approach. Federal Deposit Insurance Corporation (FDIC), tasked with management of bank failures, has first shut down the troubled Signature Bank. As a second step, it created a temporary bridge bank and transferred all the deposits and assets of Signature Bank to Signature Bridge Bank NA.
The idea is to find a potential buyer or sell assets or liquidate the bank. FDIC has sold a part of the assets of Signature Bank to a buyer - New York Community BankCorp.
The erstwhile Signature Bank had total deposits of $88.6 billion and total assets of $110.4 billion in its books as of December 2022.
Under FDIC regulations, a bridge bank holds the assets and liabilities of the failed bank till a buyer is found or the assets are liquidated.
As per the details of the deal, the current sale to New York Community BankCorp includes $18 billions of Signature Bridge Bank’s assets, and loans book of $12.9 billion, which was sold at a discount of around $2.7 billion. The total assets of the bank is around $ 110 billion.
As per FDIC, the loans of $60 billion will remain under the receivership. FDIC has a maximum of three years to dispose off the remaining loan assets.
Also Read: Deja vu! Credit Suisse's Rs 1.4 lakh cr debt wipeout reminds investors of Yes Bank's AT1 bond saga