Switzerland’s financial markets supervisor is defending its decision to force a 16 billion Swiss franc (16 billion euro) write-off in Credit Suisse debt securities that were designed to function as a shock absorber in case of a major financial event.
Following Sunday’s announcement about the “shotgun wedding” between Credit Suisse and UBS, financial markets raised questions and possible legal challenges about the status of this particular type of debt, known as AT1 and as CoCos, or contingent convertibles.
Major banks worldwide are estimated, according to Reuters, to have issued some $275 billion in such buffer debt. The instruments are mainly held by institutional investors.
Finma issued a press release on Thursday explaining its decision to force the write-off in the AT1 debt that had been issued by Credit Suisse, referring also to the bonds’ prospectuses and the Swiss governments’ emergency legislation.
“Finma has instructed Credit Suisse to write off its AT1 instruments in full and to inform the creditors concerned without delay,” it said. “Tier 2 bonds are not written off. Questions regarding individual bonds should be directed to the issuers of the capital instruments.”
Finma said Credit Suisse’s AT instruments “contractually provide that they will be fully written off in the event of a trigger event (viability event), in particular if extraordinary government support is granted”.
Finma said these conditions have been met after Switzerland’s federal government enacted a special emergency law on additional liquidity support for Credit Suisse. “The law authorises Finma to order the borrower and the financial group to write down additional core capital.”
«A solution was found on Sunday to protect clients, the financial centre and the markets,” said Finma director Urban Angehrn in a statement. “In this context, it is important that CS›s banking business continues to function smoothly and without interruption. That is now the case.»