The European Tier 1 market is dominated by issues from highly rated and rather large banks. While one can imagine one of these banks getting into trouble over the longer term, a sudden credit crisis seems unlikely. Bearing in mind the series of various cases of fraud of corporate issuers, a
similar event in the European banking sector could be a real stress test for the Tier 1 market. It is realistic to assume that in this case investors would not only face a repricing of the market, but also that there may be a period without a bid for the issues. With regard to the different structures of Tier 1 issues we believe that bonds with equity settlement features are most likely to be called, even if the issuer is in serious financial problems at the call date. Therefore, one can ask why banks do not issue common equity instead of Tier 1. The simple answer is that it is cheaper for them.
