(News Bulletin 247) – Finma, the financial market regulator, had caused controversy by deciding to completely depreciate the value of certain bank bonds. It ensures that the contracts on these instruments give it this right.

Under fire from criticism for their management of the Credit Suisse crisis, the Swiss authorities are fighting back. To preserve financial stability and the Swiss economy, the federal government and Finma, the Swiss stock market policeman, have pushed the country’s second bank into the arms of the first, UBS. This marriage is done at a bargain price, for only 3 billion Swiss francs, without consulting the shareholders, thanks to an emergency ordinance, and with another controversial decision.

Finma, the Swiss stock market watchdog, has decided to erase 16 billion Swiss francs of AT1 instruments, also known as “CoCo Bonds” (for “convertible contingent”). These debt securities are riskier than ordinary bonds because they can turn into capital or force their investors to suffer losses when a bank is in bad shape, for example when its solvency ratio falls below a certain threshold.

But the problem remains that these securities remain debts. However, investors carrying these securities were, in fine, less well treated than shareholders, who must suffer a discount of 59% on the value of their shares compared to the closing price before the operation. This contradicts the classic hierarchy of reimbursements, which requires that losses are first absorbed by shareholders and then by creditors.

A contractual possibility

“The fact that AT1 holders were wiped out while shareholders got €3 billion is a clear reversal of the normal hierarchy of claims and will not be well received by institutional investors,” Axiom AI points out.

Several central banks, such as the European Central Bank, the Bank of England or the Bank of Singapore, have issued press releases to remind them that they will always ask that this hierarchy be respected. Unlike Switzerland, therefore.

Finma reacted to this wave of criticism in a press release published this Thursday morning to defend its decision and explained that it has sufficient legal bases.

“AT1 instruments issued by Credit Suisse are contractually intended to be fully amortized [donc perdre toute leur valeur, NDLR] in the event of the occurrence of certain triggering events (viability event), in particular in the event of the granting of exceptional public aid”, explains the authority. “Extraordinary aid loans in the form of cash covered by a guarantee of the risk of failure provided by the Confederation having been granted to Credit Suisse on March 19, 2023, these contractual conditions were met for the AT1 instruments issued by the bank.

“On Sunday, a solution was found to protect customers, the financial center and the markets. Against this background, it is important that Credit Suisse’s banking activities continue to operate without interruption and without problems. This is now the case “, affirmed the director of Finma, Urban Angehrn.