On Thursday, the Swiss financial regulator FINMA (the Swiss Financial Market Supervisory Authority) stood by its recent directive for Credit Suisse to write down its Additional Tier 1 (AT1) bonds. These bonds had been a contentious element of the bank’s emergency sale to UBS, and FINMA cited their writedown as a “viability event.” According to the regulator, the loan granted to Credit Suisse by the Swiss National Bank last week fulfilled the necessary conditions for such a writedown.
Despite some objections to the move, FINMA defended its decision, stating that it was based on a thorough assessment of the bank’s financial stability and risk management practices. The regulator’s actions have sparked debate within the financial community, as some question the potential impact on the broader market for similar types of bank debt.
The controversy surrounding AT1 bonds is due to their unique structure. They are a type of hybrid security that combines elements of both debt and equity. As such, they are considered to be riskier than traditional debt instruments, but they also offer higher yields to compensate investors for this added risk. However, in times of financial stress, the terms of these bonds allow for writedowns or even conversion to equity, which can lead to significant losses for investors.
Credit Suisse’s AT1 bonds were a key part of the bank’s capital structure, and their writedown was a significant blow to the bank’s financial position. The bank had already been struggling with the fallout from the collapse of Greensill Capital and the losses from the Archegos Capital Management scandal, and the writedown of its AT1 bonds further eroded its capital base.
While some have criticized FINMA’s decision, others have praised the regulator for taking a tough stance on the issue. The writedown of Credit Suisse’s AT1 bonds is seen as a warning to other banks that have relied heavily on these instruments for capital raising. It is also seen as a reminder to investors that these bonds come with significant risks, and that they should carefully consider the potential for writedowns or conversion to equity in times of stress.
The impact of FINMA’s decision on the broader market for AT1 bonds remains to be seen. While some have raised concerns about the potential for contagion, others argue that the market for these bonds is still relatively small, and that the risks associated with them are well understood. Nevertheless, the writedown of Credit Suisse’s AT1 bonds is likely to lead to increased scrutiny of these instruments, and may prompt other regulators to take a closer look at their use in the banking sector.
FINMA’s directive for Credit Suisse to write down its AT1 bonds is a significant development in the ongoing saga of the bank’s troubles. While the decision has sparked debate and raised concerns about the broader market for these bonds, it is also seen as a necessary step to address the risks associated with these instruments. As the fallout from the Credit Suisse debacle continues to reverberate throughout the financial sector, it is clear that the issue of AT1 bonds will remain a topic of interest and concern for some time to come.