EU regulators react to bond write-down

European regulators have distanced themselves from the decision made by Swiss regulators to write off $17 billion of Credit Suisse’s bonds. The Swiss bank was rescued and its additional tier-one (AT1) bonds were written down to zero, with stock investors receiving over $3 billion as part of UBS’s takeover. In contrast, European regulators have stated that they would first write down shareholders’ investments. The hierarchy or framework sees equity investments classed as secondary to bonds when a bank is rescued.

Dominique Laboureix, the chair of the EU’s Single Resolution Board, made it clear that the board would follow this hierarchy in a banking resolution in the European context. Laboureix stated in an exclusive interview with CNBC that the board wanted to avoid being misunderstood and had “no choice but to respect this hierarchy.” This would start with absorbing the equity stack, then the AT1, then the Tier 2, and finally, the rest.

The Swiss decision has led some Credit Suisse AT1 bondholders to consider legal action, and it has sparked uncertainty for bondholders around the world. The Single Resolution Board, which became operational in 2015 in the wake of the Global Financial Crisis and sovereign debt crisis, aims to ensure that there is the least possible impact on the real economy if a bank fails in the euro zone.

Although Switzerland is not part of the European Union, the decision by Swiss regulators to write off Credit Suisse’s bonds has caused concern among bondholders. The joint statement by the Single Resolution Board, the ECB Banking Supervision, and the European Banking Authority, released on March 20, clarified that common equity instruments are the first to absorb losses, with Additional Tier 1 being required to be written down only after their full use. The statement emphasised the importance of adhering to the legal framework of the resolution hierarchy in any banking resolution scheme.