Deutsche Bank has sought to reassure investors that it is not exposed to the risky bonds issued by Credit Suisse that have been written off. The bank’s alternative tier one (AT1) bonds were written down to the sum of CHF16bn ($17bn) as part of the Swiss government’s rescue plan for Credit Suisse, but Deutsche Bank says its exposure to the bonds is “near zero”. The European Central Bank’s Christine Lagarde said banks in the euro area had “very limited” exposure to Credit Suisse and that the sector was talking in terms of millions, not billions.
The first to take losses, should a bank fail, are common equity instruments, with additional tier one (AT1) subject to write-downs only once equity has been depleted. EU banking regulators said they welcomed the “comprehensive set of actions” from Swiss authorities, but would act differently if the need ever arose.
AT1 bonds form part of bank capital categorised as contingent convertible notes (CoCos). The debt is popular with institutional investors due to the higher yields they offer compared to other bank debt and corporate bonds. However, their convertible nature means their value can be wiped out or exchanged for equity during times of distress.