The Credit Suisse CoCo Wipeout: Facts, Misperceptions, and Lessons for Financial Regulation

Swiss Finance Institute Research Paper No. 23-32

Journal of Applied Corporate Finance, Forthcoming

19 Pages Posted: 17 May 2023

See all articles by Patrick Bolton

Patrick Bolton

Imperial College London; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

Anastasia V. Kartasheva

University of St. Gallen - I.VW-HSG; Joshua J. Harris Alternative Investment Program; Swiss Finance Institute

Wei Jiang

Emory University Goizueta Business School; ECGI; NBER

Date Written: May 12, 2023

Abstract

On March 19, 2023, the Swiss Financial Market Supervisory Authority (FINMA) announced that, as part of the Credit Suisse emergency package, the contingent convertible bonds that were part of the Credit Suisse Additional Tier 1 (AT1) regulatory capital, had been written off. We review the CoCo design and economic rationales, explaining why the Credit Suisse AT1 CoCo bondholders faced losses before shareholders were wiped out. Also we analyze the reasons for the divergent view of regulators outside of Switzerland in the aftermath of the conversion. We argue that FINMA’s decision creates a healthy precedent: restoring financial discipline in AT1 bond markets by reminding investors that their investment is exposed to credit risk and that due diligence is advised before investing in these products. Credit Suisse AT1 CoCo conversion offers lessons for the effectiveness of post-GFC too-big-to-fail reforms, emphasizing that CoCo conversion that saved Swiss taxpayers USD17 Billion is a more reliable and cost-efficient policy than government-sponsored bailouts and resolution which is inherently uncertain and prone to contagion.

Keywords: Contingent convertible capital securities, bank fragility, recapitalization, too-big-to-fail, AT1

JEL Classification: G01, G21, G28

Suggested Citation

Bolton, Patrick and Kartasheva, Anastasia V. and Jiang, Wei, The Credit Suisse CoCo Wipeout: Facts, Misperceptions, and Lessons for Financial Regulation (May 12, 2023). Swiss Finance Institute Research Paper No. 23-32, Journal of Applied Corporate Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=4450098 or http://dx.doi.org/10.2139/ssrn.4450098

Patrick Bolton

Imperial College London ( email )

South Kensington Campus
Exhibition Road
London, Greater London SW7 2AZ
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

European Corporate Governance Institute (ECGI)

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

HOME PAGE: http://www.ecgi.org

Anastasia V. Kartasheva (Contact Author)

University of St. Gallen - I.VW-HSG ( email )

Kirchlistrasse 2
St. Gallen, 9010
Switzerland

Joshua J. Harris Alternative Investment Program ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Wei Jiang

Emory University Goizueta Business School ( email )

1300 Clifton Rd
Atlanta, GA 30322
United States

ECGI ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

NBER ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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