EU regulators express disagreement over AT1 bonds wipe-out by Swiss authorities

Eurozone regulators have expressed disagreement over the Swiss authorities' decision to wipe out $17bn of Credit Suisse's additional tier one (AT1) bonds on Sunday night (19 March), following approval of the bank's acquisition by UBS.

In a statement this morning (20 March), the European Banking Authority, European Central Bank and the Single Resolution Board sought to restore confidence in AT1 bonds, also known as contingent convertible (CoCo) bonds, to stem a market rout. 

The regulators reasserted to markets that under the EU's resolution framework established after the Global Financial Crisis, equity shareholders should be the first to absorb losses, with AT1 bonds only required to be written down after all common equity tier 1 (CET 1) capital has been exhausted. 

Government-supported buyout wipes out $17bn in Credit Suisse bonds

"This approach has been consistently applied in past cases and will continue to guide the actions of the SRB and ECB banking supervision in crisis interventions. Additional Tier 1 is and will remain an important component of the capital structure of European banks," they added. 

However, while it is commonly accepted knowledge that creditors hold priority over equity shareholders, within the risk factors section of documentation accompanying the sale of any AT1 bonds, Credit Suisse wrote: "Furthermore, in the case of any such cancellation, FINMA may not be required to follow any order of priority, which means, among other things, that the Notes could be cancelled in whole or in part prior to the cancellation of any or all of CSG's equity capital."

The regulators welcomed the "comprehensive set of actions" taken on Sunday by FINMA, the Swiss regulator, to ensure financial stability, adding the European banking sector is "resilient, with robust levels of capital and liquidity". 

Since their introduction in the wake of the Global Financial Crisis as part of regulatory reforms that forced banks to increase their capital levels, AT1s have grown into a roughly $260bn market.

According to Numis, the AT1s market opened down 10% this morning. Looking at ETFs focused on the sector, the Invesco AT1 ETF had fallen 14% this morning, while the WisdomTree CoCo ETF is down 13%.