Friday 29 Mar 2024
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This article first appeared in The Edge Malaysia Weekly on March 27, 2023 - April 2, 2023

It took just a matter of days for the Swiss banking authorities to change the pecking order in the liquidation process of banks. By relegating AT1, or additional Tier 1, bondholders to behind ordinary shareholders, the Swiss Financial Market Supervisory Authority (Finma) has rewritten the rules of liquidation when an entity runs into trouble.

As part of UBS AG’s takeover of financially troubled Credit Suisse, the latter’s shareholders received US$3.2 billion (RM14.2 billion) while its AT1 bondholders saw their holdings amounting to US$17 billion wiped out. Ordinarily, it should have been the reverse.

But the country’s central bank, the Swiss National Bank (SNB), justified its move by pointing out that the terms of the AT1 subscription allowed for the AT1 bondholders to be wiped out if the bank was under extreme pressure.

Despite the explanation, what prompted Finma to deviate from the norm is a matter of speculation. Some wonder if it is because the Saudi National Bank is Credit Suisse’s major shareholder and there is a lot of Arab money in Switzerland that it cannot afford to lose.

Very quickly, the other banks in Europe, the US and the UK distanced themselves from Finma’s treatment of Credit Suisse’s AT1 bondholders. The bondholders themselves have taken the case to court, which means the matter has yet to be resolved.

In the meantime, banks outside Switzerland are taking advantage of the situation by coming out firmly to state that the AT1 bonds, or what are known as “CoCo” bonds, take precedence over shareholders in any distressed situation.

AT1 bonds are the biggest source of funding for banks because they are almost like capital. The banks can call on them and there is no put option.

There will be takers for AT1 bonds but investors will have to ensure that they are treated better than shareholders.

However, UBS, which is now the biggest banking group in Switzerland, may face problems in attracting investors. If so, it is a price it may have to pay as Finma has ruffled many feathers in bending the rules in the liquidation pecking order.

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