This report does not constitute a rating action.
LONDON (S&P Global Ratings) March 23, 2023--Today's statement by the Swiss Financial Market Supervisory Authority (FINMA) to explain the basis for its decision to write down the additional tier 1 (AT1) instruments issued by Credit Suisse is in line with S&P Global Ratings' understanding. FINMA cites the issuance prospectuses for these instruments as well as the legislative powers under the Federal Council's March 19, 2023, Emergency Ordinance.
Two days ago, we expressed our view that, although many market participants had not anticipated the Swiss authorities would enforce a 100% write-down of the AT1 instruments without also bailing in common equity, the AT1 documentation, combined with the authorities' legislative powers, made this outcome possible (see "European Bank AT1 Hybrids In A Post-Credit Suisse World," published March 21, 2023, on RatingsDirect).
As part of FINMA's explanation, it states that the Credit Suisse AT1 instruments "contractually provide that they will be completely written down in a "Viability Event", in particular if extraordinary government support is granted." FINMA then states that, because Credit Suisse was granted extraordinary liquidity assistance loans secured by a federal default guarantee on March 19, 2023, these contractual conditions were met for the AT1 instruments.
FINMA also provides more background to the legislative powers that lay behind the decision, namely the March 19, 2023, Emergency Ordinance on Additional Liquidity Assistance Loans and the Granting of Federal Default Guarantees for Liquidity Assistance Loans by the Swiss National Bank to Systemically Important Banks. In addition to clearly bringing liquidity assistance loans and the associated guarantees into the concept of assessing support, and providing for derogations to the Mergers Act, article 5a of the Ordinance addresses Additional Tier 1 capital as follows:
- "At the time of the credit approval in accordance with Article 5, FINMA may order the borrower and the financial group to write down additional Tier 1 capital. The Ordinance also authorizes FINMA to order the borrower and the financial group to write down Additional Tier 1 capital."
FINMA's statement also confirms that Credit Suisse's Tier 2 instruments are not written down. We note that the documentation for one of the Tier 2 instruments, which matures in August 2023, also has viability event language. We consider that the Swiss authorities have used their powers to differentiate between AT1 instruments, which are part of the regulatory going-concern capital buffer, and Tier 2 instruments, which are not.
We view the Swiss authorities' decisions as highlighting the considerable latitude that regulatory and legislative processes can provide when it comes to imposing losses on AT1 investors and enabling authorities to act quickly during an emerging crisis. AT1 investors have been reminded of their extreme vulnerability if a bank gets into trouble, and of their dependence on decisions taken by regulators and governments. This is not the first case we have seen of emergency legislation in such an event.
Related Research
- European Bank AT1 Hybrids In A Post-Credit Suisse World, March 21, 2023
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