European banks are resilient and have strong levels of solvency and liquidity.

The banking earthquake caused by the collapse of Credit Suisse ended with the sale of the entity to UBS, with the approval of the state authorities. However, the operation failed to calm the markets. Now, the European Central Bank (ECB), together with the Single Decision Board (SRB) and the European Banking Authority (EBA), have issued a statement to try and reassure investors.

“the Banking supervision of the European Central Bank, the Single Decision Council and the European Banking Authority They welcomed the comprehensive set of measures taken by the Swiss authorities yesterday to ensure financial stability,” the statement began, adding then: “The European banking sector is resilient, with strong levels of capital and liquidity.”

Banks opened Monday with severe punishment from investors, with declines in some cases around 6%. A drop similar to when Credit Suisse was on edge last week.

Likewise, the European authorities took the opportunity to recall what the EU entity dissolution framework looks like. The decision framework it implements in European Union The reforms recommended by the Financial Stability Board after the Great Crisis have defined, among other things, the system in which the shareholders and creditors of a troubled bank must bear losses,” the three institutions note, adding the following as the losses are materialized.

“In particular, common stock instruments are the first to absorb losses, and only after full utilization may additional Tier 1 capital need to be reduced. This approach has been applied systematically in previous cases and will continue to guide banking supervision measures.”

The European system is under scrutiny

Why do they remember this? European Central Bank, SRB and EBA? Because the Credit Suisse operation has compromised the system developed in the European Union. Years ago, the old continent’s loss-absorbing system was designed for shareholders and bondholders in case a bank had to be rescued or dissolved. This consists of three steps. In the first step is the capital, called CET1, together with the profits reserves from the past years; This is because shareholders are the first to assume the red numbers. In the second step are the convertible bonds of the so-called AT1 and in the third step are other types of bonds.

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in sale condition Credit Suisse Yesterday UBS was informed about the non-European loss absorption method. The first step does not come into force, but the second step bonds of 16 thousand euros go to zero losses. Shareholders don’t see their investment gone, but “only” decreased with the stock exchange being executed.

Hence, the European institutions also came out with this statement. Thus, the goal is twofold: to try to reassure investors and to remember that in Europe such cases are handled differently. However, the three institutions have shown their support for the movement organized with Credit Suisse.

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