In a bold move amid ongoing legal battles, the Swiss Financial Market Supervisory Authority (FINMA) has declared its intent to appeal a recent partial decision by the Federal Administrative Court. The ruling, dated October 1, 2025, challenges FINMA’s 2023 order to write down Additional Tier 1 (AT1) capital instruments during the Credit Suisse crisis, potentially reshaping the landscape of financial regulation and investor protections in Switzerland.
This development revives debates surrounding one of the most contentious episodes in recent banking history: the emergency rescue of Credit Suisse through a merger with UBS, which involved wiping out billions in AT1 bonds. As FINMA prepares to take the case to the Federal Supreme Court, stakeholders are watching closely for implications on future bank resolutions and the treatment of hybrid capital instruments.
What Are AT1 Capital Instruments?
To understand the heart of this controversy, it’s essential to grasp what AT1 capital instruments are. Additional Tier 1 (AT1) bonds, also known as contingent convertible bonds or “CoCos,” are a type of hybrid debt issued by banks to strengthen their capital base under Basel III regulations. These instruments are designed to absorb losses during times of financial stress, helping banks remain operational without immediate collapse.
Key features of AT1 bonds include:
- Perpetual Nature: They have no fixed maturity date, making them more like equity than traditional debt.
- Loss Absorption Mechanism: In a crisis, AT1 bonds can be converted into common equity or written down to zero, providing a buffer to protect depositors and senior creditors.
- High Yield with Risk: Investors are attracted by higher interest rates compared to standard bonds, but they bear the risk of total loss if the bank’s capital falls below certain thresholds.
AT1 instruments form part of a bank’s Tier 1 capital, alongside common equity, and are intended to enhance financial stability by allowing banks to bolster their reserves without diluting existing shareholders immediately.
Background: The Credit Suisse Crisis and the AT1 Write-Down
The saga traces back to March 2023, when Credit Suisse, once a pillar of Swiss banking, teetered on the brink of collapse amid a series of scandals, massive outflows, and eroded investor confidence. To avert a systemic meltdown, Swiss authorities orchestrated a hasty merger with rival UBS, backed by extraordinary government guarantees and liquidity support.
As part of this rescue package, FINMA ordered the complete write-down of Credit Suisse’s AT1 bonds, totaling approximately CHF 16 billion (around $17-20 billion USD). This decision was grounded in the Federal Council’s Emergency Ordinance (PLB-EO), which aimed to stabilize the bank and facilitate the merger. The write-down effectively erased the value of these instruments, transferring the loss absorption to bondholders.
The Controversy Surrounding the AT1 Wipeout
The AT1 write-down quickly became a flashpoint of controversy, drawing ire from investors worldwide. At the core of the dispute is the inversion of the traditional capital hierarchy. In standard bankruptcy proceedings, equity holders (shareholders) are supposed to bear losses before debt holders, including AT1 bondholders. However, in the Credit Suisse case, shareholders retained some value—receiving one UBS share for every 22.48 Credit Suisse shares, equating to about CHF 3 billion—while AT1 holders were left with nothing.
Critics argued this move violated the expected pecking order, undermining trust in AT1 instruments as a reliable capital tool. Bondholders, including institutional investors and funds, claimed the decision was arbitrary and lacked a solid legal foundation, especially since the bonds’ terms typically prioritized them over equity in loss scenarios. The wipeout marked the largest loss in the AT1 market to date, prompting around 3,000 bondholders to file over 360 lawsuits against FINMA.
The controversy also highlighted broader concerns about Swiss regulatory practices. Some experts questioned whether the emergency ordinance provided sufficient authority for such a drastic action, and whether it aligned with international standards like those from the Basel Committee. The event sent shockwaves through global financial markets, raising fears about the attractiveness of AT1 bonds and potentially increasing borrowing costs for banks.
The Federal Administrative Court’s Ruling
On October 1, 2025, the Federal Administrative Court issued a partial decision in the first of these proceedings, ruling that FINMA’s write-down order lacked a valid legal basis. The court revoked the decree but has yet to determine the full consequences, such as potential compensation for affected bondholders. This non-final judgment confirmed the complainants’ right to appeal and set a precedent that could influence the remaining cases.
The decision has been hailed by bondholders as a victory, with legal representatives expressing optimism about recovering losses. However, it underscores ongoing tensions between regulatory expediency in crises and adherence to legal frameworks.
FINMA’s Appeal and Future Implications
Undeterred, FINMA announced on October 15, 2025, its plan to contest the ruling by appealing to the Federal Supreme Court within the 30-day window. The regulator maintains that the write-down was a necessary component of the overall stabilization package, essential for preventing a broader financial catastrophe.
The outcome of this appeal could have profound effects. A upheld ruling might lead to compensation claims against the Swiss government or UBS, potentially costing billions and affecting UBS’s balance sheet. Conversely, a reversal could reinforce FINMA’s authority in future resolutions. Beyond Switzerland, this case may influence how regulators worldwide handle hybrid capital in bank rescues, impacting investor confidence in AT1 markets.
As the legal saga unfolds, it serves as a stark reminder of the delicate balance between financial stability and investor rights in times of crisis.
For more details, visit the official FINMA press release: FINMA News on AT1 Appeal.
Disclaimer: This article is based on publicly available information from FINMA’s press release and other sources. For the most accurate and up-to-date details, please refer to the official source linked above.
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