Livin’ la vida CoCo not possible in circumstances: Regulator defends AT1 wipe out in Credit Suisse merger
The Swiss banking regulator defended its decision to wipe out alternative tier 1 (AT1) bondholders – also known as CoCo bonds – in the merger of UBS and Credit Suisse.
In a statement put out today, Finma said Credit Suisse’s coco bonds could contractually be completely written down in a ‘viability event’, particularly if there was “extraordinary government support”.
The watchdog said those conditions were met after Credit Suisse was granted “extraordinary liquidity assistance loans” on 19 March.
“On Sunday, a solution could be found to protect clients, the financial centre 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,” Finma CEO Urban Angehrn said.
Finma said it had received “numerous enquiries” about the bonds, which have been one of the most controversial aspects of the deal.
A coco bond is a one that is converted into equity if a bank falls below a certain, pre-decided strength or capital limit. They’re a creation of post-financial crisis reforms and help a bank to meet capital requirements.
Credit Suisse’s CoCo bondholders were wiped out to the tune of $17bn while shareholders received some compensation, inverting the traditional hierarchy of creditors.
After fears that the cost of bank funding might increase significantly as a result of the wipeout, the ECB and the Bank of England both put out statements confirming that bondholders would be compensated before shareholders if another bank went bust.
A group of shareholders have pushed for legal action against the wipeout, with litigation firm Quinn Emanuel Urquhart & Sullivan acting on behalf of bondholders.
The news comes as the Swiss National Bank (SNB) raised interest rates by 50 basis points to 1.5 per cent and defended the merger of Switzerland’s banking giants.
“The measures announced at the weekend by the federal government, FINMA and the SNB have put a halt to the crisis,” it said in a statement.
In the proceeding press conference, SNB chair Thomas Jordan said putting Credit Suisse into resolution was not an option.
“We were in an extremely fragile environment…there was enormous nervousness in financial markets in general. In those circumstances going into resolution would have triggered a financial crisis not just in Switzerland but globally.”
“It was very clear in those circumstances that resolution would not work to stabilise the financial system…it could be the trigger of a bigger and larger crisis,” he continued.