Bank Bondholders Helped Fuel Tumble in Share Prices, BIS Says

A slump in financial shares was partly driven by bondholders hedging the riskiest type of banking debt, according to the Bank for International Settlements.

“Movements in the prices of bank securities have been exacerbated by market dynamics,” BIS said in a report published Sunday. Fixed-income investors may have shorted bank stocks to offset potential losses from contingent-convertible, or CoCo, notes, said the Basel, Switzerland-based coordinator of the world’s biggest central banks.

European bank shares have fallen more than 30 percent from a high in July amid concerns about the pace of restructuring and the impact of negative interest rates on profits. CoCos issued by lenders including Deutsche Bank AG, Barclays Plc and Royal Bank of Scotland Group Plc have dropped by as much as 20 cents on the euro this year.

The Stoxx 600 Banks Index fell 1 percent on Monday. A gauge of credit-default swaps on subordinated financial debt was at 217 basis points, down from an almost three-year high of 314 basis points on Feb. 11, according to data compiled by Bloomberg.

Losses imposed on creditors at Portugal-based Novo Banco SA and at four small Italian lenders in November have also added to bank bondholders’ skittishness, BIS said. 

Lenders can be prevented from making coupon payments on some CoCos, known as additional Tier 1 bonds, if they run into financial trouble.

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