Holders of $17bn of Credit Suisse’s AT1 bonds had their holdings wiped out as part of the historic takeover of the bank by UBS earlier this year, a move that had sparked controversy across European debt markets.
The decision forced the Bank of England and EU regulators to step in with veiled disagreement to the move by FINMA, the Swiss regulator, in order to stem a potential market rout.
EU regulators express disagreement over AT1 bonds wipe-out by Swiss authorities
According to a report by Reuters, ECB chief supervisor Andrea Enria supported for the regulator’s decision, given that it aligned with provisions embedded in local Swiss bonds.
The AT1 bonds were issued by Credit Suisse as part of its capital structure to meet regulatory capital requirements and contained a clause allowing Swiss authorities to write them off, regardless of what happened to the shares if the bank fell insolvent.
However, during the annual conference of the European Systemic Risk Board yesterday (16 November), he encouraged international standard-setters within the Basel Committee on Banking Supervision to bring order to this market.
What are AT1 bonds and why is Credit Suisse’s $17bn wipe-out controversial?
“It would be good if the Basel committee could in future think further on some standardisation of contracts in these areas,” he said.
“Adding some common features, I think, would be beneficial to avoid that there is a sort of contagion between different instruments and that everybody understands how they work in times of stress.”
Pablo Hernández de Cos, the Basel committee’s chair, said the issue was “on the list”, according to Reuters.
Last month, the Basel Committee said in a report it would review the features of AT1 bonds, including the “loss-absorbing hierarchy”.
