MNI INTERVIEW: AT1s Face Uncertain Future-Swiss Expert
Fallout from Credit Suisse collapse means accepted bank bail-in hierarchy is less secure, ex-SNB, FINMA expert tells MNI.
There are questions over the suitability of Additional Tier 1 bonds as going-concern buffers and the securities may eventually be phased out, the chair of an expert group set up by Switzerland’s Federal Department of Finance in the wake of the demise of Credit Suisse told MNI.
The decision by the Swiss Financial Market Authority during the hurried takeover of Credit Suisse by rival UBS in March to wipe out holders of AT1 bonds worth around CHF16 billion while allowing equity holders to retain part of their stake, in an inversion of the usual hierarchy, led to a global AT1 sell-off and lawsuits by disgruntled investors. (See MNI INTERVIEW: Swiss Should Explain Why Emergency Plan Ignored).
But, Yvan Lengwiler, whose report has now been submitted to regulators, said in an interview that investors had to come to terms with the true nature of AT1s.
ECB, BOE SHOCK
“AT1’s are supposed to be going-concern capital; that means they are converted into equity or zeroed before you go into a resolution. In the resolution, equity holders lose everything and you’re likely to do a bail-in. But before that, they don’t lose everything. That in itself implies that the usual hierarchy - shareholders are the first in line to bear losses - has actually never been true,” he said.
Lengwiler, a former senior economist at the SNB and FINMA Board member, said he understood the shocked reaction to the Swiss move by the European Central Bank and the Bank of England, which issued statements to reassure AT1 holders in their own jurisdictions,
But, he said, “I'm not sure this is consistent with the construction of AT1 bonds. In the long run, AT1s might be phased out and replaced with CET1, but that will take a long time.”