Bailout Blues: the Write-Down of the AT1 Bonds in the Credit Suisse Bailout

17 Pages Posted: 28 Apr 2023 Last revised: 3 May 2023

See all articles by Javier Paz Valbuena

Javier Paz Valbuena

University of Oxford, Faculty of Law

Horst Eidenmueller

University of Oxford - Faculty of Law; European Corporate Governance Institute (ECGI)

Date Written: April 1, 2023

Abstract

The recent bailout of Credit Suisse is noteworthy for many reasons. One of them is that, while AT1 bondholders were wiped out, shareholders were not. This violates the ‘absolute priority rule’ which is central to corporate reorganisations and bank resolution regimes. In this article, we analyse the motives and mechanics of the write-down and argue that, given the bond terms, the prospect for a legal challenge by the bondholders is slim. At the same time, we question the merits of the write-down. Bondholders should fare no worse than common equity, regardless of whether a financial institution is put in an insolvency proceeding or bailed out, and the applicable bond terms should reflect this. We also raise the issue of a more principled approach to bailouts more generally.

Keywords: Ad hoc bailout, Financial regulation, Insolvency, Bankruptcy, Bank resolution, AT1 bonds

Suggested Citation

Paz Valbuena, Javier and Eidenmueller, Horst G. M., Bailout Blues: the Write-Down of the AT1 Bonds in the Credit Suisse Bailout (April 1, 2023). European Corporate Governance Institute - Law Working Paper No. 705/2023, Available at SSRN: https://ssrn.com/abstract=4431170 or http://dx.doi.org/10.2139/ssrn.4431170

Javier Paz Valbuena

University of Oxford, Faculty of Law ( email )

Oxford
United Kingdom

HOME PAGE: http://https://www.law.ox.ac.uk/people/javier-paz-valbuena

Horst G. M. Eidenmueller (Contact Author)

University of Oxford - Faculty of Law ( email )

St Cross Building
St Cross Road
Oxford, OX1 3UL
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
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1000 Brussels
Belgium

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