The Monetary Authority of Singapore (MAS), on March 22, announced that it intends to stick to the hierarchy of claims in liquidation should it need to exercise its powers to resolve a financial institution (FI). This means that equity holders will absorb losses before holders of Additional Tier 1 (AT1) and Tier 2 capital instruments.
The central bank’s statement comes after the Swiss Financial Market Authority (FINMA) determined that Credit Suisse’s AT1 capital of 16 billion Swiss francs ($23.12 billion) will be written off to zero on March 19.
In the event that an FI is resolved, creditors who receive less than they would if the FI had been liquidated, would be able to claim the difference from a resolution fund. The fund will be funded by the financial industry, MAS added in its statement.
The creditor compensation framework will also apply in rare situations where MAS departs from the creditor hierarchy. This will only happen if MAS needs to contain the potential systemic impact of the FI’s failure or to maximise the value of the FI for the benefit of all creditors as a whole.
MAS says its resolution framework is in line with the Financial Stability Board’s report, Key Attributes of Effective Resolution Regimes for Financial Institutions.
“AT1 bonds in Singapore are offered in the wholesale market, which is only for institutional investors, accredited investors, or transactions in denominations of at least $200,000. No prospectus for the offering of AT1 bonds to retail investors has been registered with MAS,” continues the central bank.
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“As with other investment products, FIs that offer or distribute AT1 bonds are expected to make accurate and clear disclosures of key product features and risks to investors. Investors should understand the risks and rewards, and exercise due care in their selection of investment products,” it adds.
