Disruption to the expected creditor hierarchy as Credit Suisse’s CHF 16bn in AT1 securities were permanently written down to zero could have knock-on effects for the AT1 market, however.

“Recent events will encourage investors to be more focused on the terms and conditions of the securities, and, as the asset class is still relatively young, investors will also have gained a further data point about how these securities can behave,” said Pauline Lambert, executive director in Scope’s financial institutions team. “At the same time, there are questions about whether the AT1 market remains open for banks and at what cost.”

Since Credit Suisse’s AT1 write-down, no European bank had issued AT1 or Tier 2 securities as of April 17. There are also questions around whether outstanding securities will be called. Aareal Bank and Deutsche Pfandbriefbank decided not to call their AT1s later this month, citing market conditions and economic costs. Raiffeisen Bank International, which extended its AT1 in December 2022, may do so again on 15 June. The market is viewing UniCredit’s 3 June call decision with interest.

Since our last quarterly, the ECB has published the results of the 2022 SREP exercise. Changes to Pillar 2 requirements (P2R) were relatively minor but there was a new add-on for a few banks with very high leveraged finance exposures or highly deficient risk controls in this business. As well, a total of 24 banks received a P2R add-on of up to 50bp because of inadequate provisions for non-performing exposures.

“Overall SREP scores were broadly stable compared to the prior year. Over a longer time period, however, the share of overall scores indicating a medium-high risk level continues to rise,” Lambert said. The ECB has introduced more granular assessments, adding positive and negative qualifiers to overall SREP scores, which will be interesting to monitor.

Total capital requirements and guidance for supervised institutions increased on average from 14.7% to 15% of RWA year over year. The average P2R remained stable at around 2%. As several announced increases in countercyclical (CCyB) and systemic risk buffers became applicable from 2023, the average combined buffer requirement grew to 3.8% in the first quarter, up from 3.6% a year before. Pending increases in CCyB rates in several countries (Ireland, Netherlands, Sweden, UK) will mean a higher average combined buffer requirement by year-end.

Areas of concern

“The ECB did highlight some areas of concern: the effectiveness of management bodies in terms of their composition, suitability and oversight capabilities; issues related to risk management frameworks, mainly regarding the risk appetite and practices used to manage climate and environmental risks; insufficient attention and resources allocated to compliance and internal audit functions; and persistent fragmented and non-harmonised IT platforms,” Lambert noted.

Planned capital distributions for 2023 are similar to those of last year, with the average payout ratio being 51%. Distributions are based on bank-specific capital projections under baseline and adverse scenarios and are subject to supervisory review. A handful of banks adjusted their distribution plans as part of the supervisory dialogue.

Given recent events, regulators have become more vocal about the need for caution although we have not seen banks stepping away from announced dividend policies or share buybacks. Some banks, like BNP Paribas, KBC and HSBC, intend to make special distributions following planned business disposals. UBS is an exception; the group announced a temporary suspension to share buybacks as it acquires Credit Suisse.

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