Credit Suisse's full write-off of its AT1 debt as a condition of its takeover by UBS has come under severe criticism. After receiving numerous inquiries, the financial regulator explains the decision.

In the forced marriage between Credit Suisse and UBS, the Swiss Financial Market Supervisory Authority (Finma) instructed Credit Suisse to write off its AT1 bonds with a value of 16 billion Swiss francs ($17.3 billion) in full. That decision has sparked widespread criticism and laid the ground for lawsuits.

In its defense, Finma said the AT1 instruments, often referred to as CoCo bonds (contingent convertible bonds), issued by Credit Suisse provide a contractual basis that they can be fully written down in a «viability event.» This is particularly the case if «extraordinary government support is granted,» according to a statement from the regulator on Thursday. 

Extraordinary Liquidity Grant

Finma said since Credit Suisse was granted extraordinary liquidity support loans secured by a default guarantee from the Swiss government on March 19, these contractual conditions were met for Credit Suisse's AT1 instruments.

Federal Council Ordinance 

On the same day, the Swiss Federal Council enacted an emergency ordinance (PLB-NVO) on additional liquidity assistance loans and the granting of federal default guarantees for liquidity assistance loans of the Swiss National Bank (SNB) to systemically important banks. «The ordinance authorizes Finma to order the borrower and the financial group to write down additional core capital,» it said.

With those two conditions fulfilled, Finma, instructed Credit Suisse to write down the AT1 bonds.

Functioning Smoothly

«On Sunday, a solution could be found to protect clients, the financial center, and the markets. In this context, it is important that CS’s banking business continues to function smoothly and without interruption. That is now the case,» said Finma Director Urban Angehrn.

AT1 instruments in Switzerland are designed to be written down or converted into hard core capital before the affected bank's equity is completely depleted or written down. The instruments publicly issued by large banks are mainly held by institutional investors due to the risk profile and the design in large denominations, Finma said.