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Following the wipeout of $17 billion in Credit Suisse bonds in a takeover by UBS on Monday, which raised concerns about comparable debt and signaled more unrest in European markets, Asian bank debt and shares plummeted.
In Hong Kong, HSBC shares dropped 6%, Standard Chartered shares dropped 5%, and Bank of East Asia shares dropped 3.5%. Certain bank bonds that were intended to cover losses in the event of a banking failure saw significant drops.
As part of the bailout agreement with UBS, Swiss regulator Finma asked on Sunday that Credit Suisse's additional tier one (AT1) bonds, a category of bank debt designed to absorb losses during a crisis, be written down to zero in the amount of SFr16 billion.
The hierarchy of claims in the case of a financial failure was called into question by Finma's ruling, which caused AT1 debtholders to lose more money than Credit Suisse shareholders. It was the largest write-down of AT1 debt to date.
According to Gary Ng, senior economist at Natixis in Hong Kong, "t is a wake-up call to investors that AT1 bonds carry real risks of being written off in extreme scenarios, which is also the purpose of having such bonds. The move will likely trigger some sell-offs and risk rebalancing from bond investors and wealth management product holders in Asia."
The price of the 3.3% perpetual dollar note from DBS Group Holdings dropped as much as 2.6 cents to 90.7 cents. The 5.825% dollar note from Hong Kong lender Bank of East Asia sank as much as 8.5 cents to 81.7 cents, while the 4.5% dollar note from Thailand's Kasikornbank dropped as much as 4.5 cents to 80.7 cents.
Following the 2008 financial crisis, hundreds of billions of dollars' worth of AT1 bonds were issued as part of a global regulatory initiative to transfer the risk of bank failure to investors in bonds susceptible to writedowns in a crisis.
Even though they were also written down as part of the demise of Banco Popular in Spain in 2017, they have only occasionally suffered losses thus far.
AT1s are frequently owned by hedge funds and professional bond investors, but they are also popular with Asian retail and wealth management investors.
Most Asian stocks opened lower. In morning trade, the Topix in Japan lost 1.2%, while the Kospi in South Korea lost 0.5%. The Hang Seng index in Hong Kong fell by 2.6%, while the China's CSI 300 increased by 0.1%. The Topix Banks index for Japan fell 1.8%.
Mitsubishi UFJ Financial Group, Mizuho, and Sumitomo Mitsui Financial Group shares all recorded small rises at the open but later in the morning reversed those gains.
Following the Credit Suisse agreement, US futures were up on Monday, with the S&P 500 and Nasdaq 100 contracts rising 0.7% and 0.5%, respectively.
The yen fell 0.3% to 132.21 per dollar in early trading on Monday after starting to rise against the dollar last week on speculation over the diminishing possibility of more US Fed rate increases.
By fLEXI tEAM