Swiss regulator defends controversial $17 billion writedown of Credit Suisse bonds

Swiss regulator FINMA on Thursday defended its decision to instruct Credit Suisse to write down its AT1 bonds — a controversial part of the lender’s emergency sale to UBS — saying it was a “viability event.”

The regulator said the loan Credit Suisse received from the Swiss National Bank last week, backed by the federal government, meant the conditions for a writedown had been met.

The regulator instructed Credit Suisse to write down 16 billion Swiss francs of AT1 bonds, widely regarded as relatively risky investments, to zero, while equity shareholders will receive payouts at the stock’s takeover value.

This decision upended the usual European hierarchy of restitution in the event of a bank failure under the post-financial crisis Basel III framework, which ordinarily places AT1 bondholders above stock investors. Bondholders are exploring legal action over the contentious writedown.

“The AT1 instruments issued by Credit Suisse contractually provide that they will be completely written down in a ‘viability event,’ in particular if extraordinary government support is granted,” FINMA said in a statement Thursday.

“As Credit Suisse received extraordinary liquidity assistance loans secured by a federal default guarantee on 19 March 2023, these contractual conditions were met for the AT1 instruments issued by the bank.”

After its share price plunged to an all-time low last week, Credit Suisse announced that it had secured a loan of up to 50 billion Swiss francs from the Swiss National Bank, and provided substantial liquidity assistance to the lender as authorities scrambled to put together a rescue deal on Sunday.

The Swiss federal government enacted an emergency ordinance to guarantee the additional liquidity assistance from the SNB to Credit Suisse, in order to ensure the successful implementation of the UBS takeover.

The ordinance also authorized FINMA to “order the borrower and the financial group to write down Additional Tier 1 capital,” the regulator said Thursday.

“On Sunday, a solution could be found to protect clients, the financial centre and the markets,” said FINMA CEO Urban Angehrn.

“In this context, it is important that CS’s banking business continues to function smoothly and without interruption. That is now the case.”

Swiss National Bank Chairman Thomas Jordan acknowledged in a press conference on Thursday that the UBS absorption of Credit Suisse creates “a new situation for the advisory authority” in terms of the new entity’s scale and competition considerations.

“UBS will be a very big bank and competition issues will be relevant as well … we have to make sure in the future in Switzerland there will be enough competition for banking services,” Jordan said.

“The focus has to be on ensuring that we can maintain financial stability under all circumstances and that the closing of the deal will be smooth and fast.”

The deal creates a business with more than $5 trillion in invested assets, but UBS has said it will look to downsize some parts of the acquired Credit Suisse businesses.