Credit Suisse’s AT1 Controversy Unlikely Outside Switzerland

DBRS Morningstar released a commentary about the implications of the Swiss authorities decision to write-down Credit Suisse´s AT1s instruments for the treatment of AT1 instruments in other jurisdictions:

• In the recent sale of Credit Suisse AG (CS) to UBS, Swiss authorities decided to write down CS´s AT1 instruments to zero. However, they also decided to preserve some value for equity holders of CS.

• These decisions were possible given the specific language of Swiss banks’ AT1 instruments, but they have led to some investor concerns about creditor hierarchy for the global AT1 market.

• Whilst the CS deal was not tagged as a resolution by the Swiss authorities, it raised questions about the real risks of AT1 instruments across different jurisdictions. The Swiss decision triggered a quick reply from other national authorities, including in the EU, UK and Canada. These authorities have clarified that AT1 bonds are senior to equity, and expected losses in recovery, resolution or insolvency should always respect this ranking.

“We note some important takeaways from this case, that are applicable to all resolution regimes. First, the complexity of resolution and quasi resolution situations makes the reality different from theoretical resolution planning. Second, that in those situations the interpretation of the law made by national authorities could be different from what markets expect. Third, that bail-in strategies for Globally Systemically Important Banks (G-SIB) are difficult and the too big to fail issue is still present,” said Pablo Manzano, Vice President from the DBRS Morningstar Global Financial Group team.

“Nevertheless, we view that the decision to impose larger losses on the AT1 securities than on shareholders, will not set a precedent in the EU, UK or Canada," said Maria Rivas, Senior Vice President from the DBRS Morningstar Global Financial Group team. "We consider that these resolution regimes are clearer and authorities have been vocal to clarify that AT1 securities are always senior to equity.”