Subordinated bonds are not a safe bet
Die CreditSuisse and the Swiss supervisors have brought the niche product of subordinated bank bonds of the AT1 class into the public eye. The write-downs of CHF 16 billion represent the largest loss event to date in this niche and could have repercussions for the financing of the major international banks.
However, there is no reason to fear that the AT1 bonds will develop a similar impact as the securitization of mortgage loans in the great financial crisis of 2008. With a volume of 250 billion euros, the global volume of these titles is manageable. And the banks have a way out if investors refrain from these stocks in the near future. They can bolster their equity with either shares or retained earnings should the need arise.
painful losses
The losses from the complete write-off of Credit Suisse stocks can be painful. Fund companies like Pimco or Invesco should feel that. You are threatened with losses in the hundreds of millions. But maybe that’s also a lesson, because in recent months funds have been advertising increasingly aggressively among private investors for the asset class, which continues to have very attractive interest rates.
If a bank is in trouble, the default risk of a subordinated bond is greater than that of an ordinary debt instrument. Investors need to be aware of that now.
