Is our money still safe in a bank?

March 27, 2023 0 By Michel Santi

In the CS rescue operation, the Confederation, the SNB and the regulator (Finma) took a decision with serious consequences: to sacrifice Tier 1 bonds, nicknamed “CoCo bonds” or “contingent convertible bonds”.

These are hybrid securities between capital and debt, of better quality and which take precedence over equities, a sort of first mortgage. The authorities therefore canceled 17 billion of these bonds, which became obsolete and worthless, while the shareholders were privileged and still kept 3 billion despite common sense.
Because, in a normal world, it is the shareholder who is supposed to take all the risks.

Immediately, so as not to disturb the holders of these bonds, European authorities affirmed that they still considered (unlike the Swiss) CoCo bonds as hybrid securities between capital and debt. Logically and according to the rule: priority over shares in the event of a liquidation.

Moreover, the Credit Suisse debacle is instructive on how the soundness of banks is assessed. This bank far exceeded all the required prudential ratios.

First, the Common Equity 1 solvency ratio = the risk-weighted ratio between equity (capital + reserves) and the bank’s assets (market position, corporate loans, etc.). This ratio – which has tightened between the Basel I and Basel III banking regulations – now sets the threshold limit at 10.6% in Europe. However, Credit Suisse had a much higher ratio of 14.1% !

The second criterion being the short-term liquidity ratio which ensures that a bank has an adequate level of high-quality liquid assets capable of being converted into liquidity to cover its needs over a period of 30 days, in the event of serious financing difficulties.

This ratio – which must be greater than or equal to 100% – was 150% for CS !

This allows me to return to the question: is our money still safe in a bank?

In my opinion, the crucial problem does not come so much from the banks, which must be monitored and channeled anyway.
The major concern is that we are now witnessing a lot of clumsiness from both the regulator and of the central banks, both supposed to police the markets.

Through actions described above, the regulatory authorities at the highest level have – if not violated the laws – at least disrupted the rules of the game in a very disturbing way.

Such levity will inevitably raise existential and legitimate questions among the whole chain, from investors to savers, because – after all – if the beacon or the supreme guide that are the regulator and the central bank do not respect the rules of the game, why be so demanding towards the simple banker who is just asked to earn money?

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