New on FinoLib · Volume II: Capital Markets
I have added a new article to FinoLib, my finance education website: Archegos, Credit Suisse and Other Modern Credit Failures, part of Volume II: Capital Markets. This page gives you the core of the topic in expert but plain language; the full article goes much deeper.
The idea in plain words
Five modern failures broke on funding, not on a bubble. IL&FS in 2018 funded long projects with short borrowing. Yes Bank in 2020 and Credit Suisse in 2023 had their AT1 bonds written down to zero in rescues. Archegos in 2021 hid $160 billion of exposure on $36 billion of capital using swaps. And in 2022 UK pension funds using LDI were solvent but short of cash when gilt yields jumped 160 basis points.
Key points
■IL&FS’s group debt exceeded ₹91,000 crore; the RBI’s 2019 response made large non-bank lenders hold a liquidity coverage ratio reaching 100% by December 2024.
■Yes Bank’s ₹8,415 crore of AT1 was written off; SEBI now limits new AT1 issues to institutions in ₹1 crore lots.
■Archegos cost banks at least $10.4 billion, Credit Suisse $5.5 billion of it.
■The Bank of England bought £19.3 billion of gilts when forced sales threatened 4.2 days of normal trading.
A closer look
None of these five was a classic bubble. Each balance sheet worked in calm markets and failed when funding or collateral had to be paid in cash at once. Two turned on Additional Tier 1 (AT1) capital: perpetual bonds that count as bank capital because their terms let them be written down or converted into shares when capital falls below a trigger or a supervisor declares a point of non-viability (PONV). They pay a higher coupon for that risk.
IL&FS, 2018: long assets, short funding. Infrastructure Leasing & Financial Services funded projects that paid back over 20 to 25 years with borrowings that had to be repaid or rolled over far sooner. Group entities defaulted from July to September 2018 with debt above ₹91,000 crore, about $12.6 billion at ₹72.28 per dollar. On October 1, 2018, the government took control of the board through the National Company Law Tribunal. The IMF later noted that non-bank lenders and mutual funds faced liquidity strains after the default and that mutual funds cut their non-bank commercial paper by over 60%.
A worked example
Worked Example — Who Absorbs the Loss
An illustrative bank holds $5 billion of Common Equity Tier 1, $2 billion of AT1 and $3 billion of Tier 2 beneath $90 billion of deposits and senior debt, and loses $6 billion. Holder Standard order (equity first) AT1 written off first Shareholders ($5bn) −$5bn (100%) −$4bn (80%) AT1 ($2bn) −$1bn (50%) −$2bn (100%) Tier 2 and senior $0 $0 The total is $5bn + $1bn = $4bn + $2bn = $6bn either way; only the allocation moves, and for the AT1 holder it doubles the loss from 50% to 100%. Read the trigger clause, not the ranking chart.
Decision rule
Before owning any leveraged or hybrid position, answer three questions. Who can demand cash from you, and how fast? How many days of normal market volume would you need to raise it by selling? Which clause can wipe you out ahead of holders you think rank below you? If a week’s cash calls could exceed your liquid assets, or a regulator’s judgment rather than a number you can track triggers the wipe-out, cut the size or demand a yield that pays for a total loss.
The costliest mistake
Buying an AT1 bond as if it were a deposit or a senior bond. Yes Bank’s ₹8,415 crore and Credit Suisse’s roughly CHF 16 billion of AT1 went to zero while depositors were protected, and Credit Suisse’s shareholders still received CHF 3 billion of UBS shares. Assume a total loss in any rescue and size the holding so that a 100% loss is survivable.
Recap
IL&FS, Yes Bank, Archegos, UK LDI funds and Credit Suisse failed when funding or collateral had to be paid in cash at once, not because of a classic bubble. Two of them wrote AT1 bonds to zero, so the trigger clause, not the ranking chart, decides what such an investor gets back.
What the full article covers
The full article includes worked examples, a clear decision rule, the one mistake that costs people the most, a recap, a reveal-on-click quiz and the official sources behind every figure.
Volume II: Capital Markets
Read the full article on FinoLib
The complete article, Archegos, Credit Suisse and Other Modern Credit Failures, with every worked example, diagram, quiz and source, is free to read in Volume II, Capital Markets on finolib.com.
Explore the Finance Education Series: Vol. II — Capital Markets · Vol. I — Global Economy · Vol. III — Finance Encyclopedia · Vol. IV — Finance Careers · Vol. V — Personal Finance