The decision to wipe out Credit Suisse's US$17bn Additional Tier 1 (AT1) bonds as part of its takeover by rival USB will have "profound" implications for global bank regulations, Standard Chartered chief Bill Winters told a financial forum in Hong Kong on Friday.
Winters questioned the process by which regulators assess the financial health of financial institutions, noting that the banks at the centre of the recent market turmoil – Silvergate, Silicon Valley Bank and Credit Suisse – “would appear to have been solvent”, if not liquid.
Confidence in the banking sector’s solvency isn’t so much the issue, “it’s, does the market have confidence in our liquidity?” said Winters.
“The big question is how do you wipe out US$17bn of AT1s in a solvent bank without a review process?” pondered Winters. “I think it had very profound implications for the regulation of banks and for the way banks manage themselves.”
As for the Federal Reserve’s decision to protect 100% of depositors at Silicon Valley Bank, despite up to 95% not being covered under US deposit insurance policy, Winters called it “the most wonderful example of moral hazard we’ve come across for quite a while”.
Deposit insurance as maintained by the Federal Deposit Insurance Corporation (FDIC) typically only covers deposits up to US$250,000, but SVB’s client portfolio of tech companies and venture capital firms naturally had considerably more worth on deposits on average.
There appears to be confusion in the market over whether depositors will be made whole in future liquidity crises.
Treasury secretary Janet Yellen ruled out a broad expansion of deposit insurance to protect savers with balances over US$250,000, though there have been calls from lawmakers to raise the insurance cap, or even extend insurance to all deposits.
Biden had called on Congress to grant regulators greater power over the banking sector, including leveraging higher fines for managers, clawing back compensation and barring officials from banks that have failed to remain liquid.