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Regulators scurry to establish clarity over AT1 bonds

As the fall out from the Credit Suisse write down on AT1 continues, other regulators race to set out some clarity as to the treatment of these curious assets.

Photo by Tim Foster on Unsplash


"We won't take anyone by surprise," said Dominique Laboureix, chair of the Single Resolution Board, according to the Financial Times.


“We should be extremely clear on this crucial element: yes indeed we want to follow this order, because it gives clarity to the investors,” he told the Financial Times in an interview. “If not, who will invest in banking issuances, if there is this possibility that each and every authority in the EU can decide whatever it wants depending on the conditions of the day?”


A legacy of the Great Financial Crisis (GFC), AT1 and similar bonds are designed to take write-downs in the event a bank needs intervention by the central bank or regulators. The new post GFC bank resolution powers of central banks now allowed them to take control of and unwind a vulnerable bank virtually unchallenged. Prior to that, banks were simply another private corporation, but practically lengthy corporate bankruptcy proceedings could not work with major institutions embedded centrally into the plumbing of the financial system.


In the rescue of Credit Suisse, its Swiss regulators wrote down their AT1 bonds to zero, whilst securing a (low) market price for their shares as part of the take-over by rival national UBS. This has created some controversy and perhaps even the prospect of litigation.


As Fitch points out in a note, the recent action by the Swiss has thrown the cat amongst the bond investor pigeons. Being bonds, the AT1 bonds should rank higher than equity holders in the event of a bankruptcy, however, as part of this central bank led rescue, the bonds will recover less than the shares.


The Swiss regulators have responded to AT1 bondholder concerns by effectively saying, "tough, read the prospectus". Or to put it in more mundane terms, Swiss laws give their regulators far more power than their international counterparts.


Algebris Investments covers the issue quite well on their blog. The language of the CS AT1 is quite clear in that under the scenario of an intervention, they can be written down. By contrast, as Algebris point out, EU regulators are clear that equity instruments will be the first to absorb losses, and write downs of AT1 follow.


Whilst on the face of it the EU and BoE clarifications suggest that litigators may have good reason to pursue the Swiss authorities or other parties, the challenge remains that the Swiss central bank and legislators have far stronger mandates under their local laws and the implementation of the Basel guidance. Finally, despite the assurances of central banks, the change in philosophy post GFC, suggests that the state (or the taxpayer) will have a far bigger say in the financial system, and that position is codified in the new regulatory and accompanying legislative framework.


As arch libertarian Jim Rickards has been saying for sometime in his books and interviews, the regulators are really very powerful today: a very intended consequence of the post GFC reforms.


We will leave the last word to the FT: "The decisions in Switzerland — coupled with efforts by the US authorities to underpin confidence following the failure of two banks and to boost global dollar liquidity — showed authorities were taking the necessary steps to stabilise the markets." - quite, that was always the plan post GFC. We set this out in a longer piece in November 2022, here.


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See link to FT article here: https://www.ft.com/content/0443875a-fcac-476b-82ac-3ee37d0ccaf7


See link to Algebris note: https://www.algebris.com/market-views/the-curious-incident-of-credit-suisse-at1/


See link to Fitch note: https://www.fitchratings.com/research/banks/swiss-at1-treatment-does-not-mark-regulatory-paradigm-shift-23-03-2023

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