AT1 Bonds

After the Swiss government facilitated UBS’ acquisition of banking rival Credit Suisse, the global banking system was shocked by the Swiss Financial Market Supervisory Authority’s (FINMA) decision for a “complete writedown” of Credit Suisse’s AT1 bonds.

This begs the question, what are AT1 Bonds? AT1 Bonds, which stands for Additional Tier 1 Bonds, are a type of debt instrument issued by banks to raise capital. For investors, they provide an opportunity to earn (higher) yields, albeit with higher risk profile compared to most other bonds. After the 2008 financial crisis, regulations were put in place to mitigate the possibility of bank insolvency, including rules for minimum capital. AT1 instruments are designed to help financial institutions meet these regulatory requirements for capital adequacy. They can in some instances be converted into equity if levels of capital fall below regulatory requirements.

AT1 Bonds have unique features that distinguish them from other types of debt. For example, they have no fixed maturity date and for interest to be paid certain criteria have to be met. For example, a bank can choose not to pay interest due to poor financial performance. If a bank collapses, creditors (bondholders) should take priority over shareholders when it comes to recovering losses. However, in the case of Credit Suisse, Swiss regulators have upended the creditor hierarchy as shareholders were partially compensated and AT1 investors received nothing. Naturally, this has led to strong discontent amongst bondholders and has shocked the global financial markets.

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