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

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