The Swiss Financial Market Supervisory Authority (FINMA) announced it would write off CHF 16 billion (AU$25.6 billion) in Additional Tier 1 (AT 1) capital notes issued by Credit Suisse to bondholders to support competitor UBS’ AU$4.8 billion acquisition.
The write off is expected to bolster the liquidity position of the combined entity, used to service costs associated with the transition.
The move has rattled markets, casting doubt over the security of AT 1 investments.
US law firm Quinn Emanuel Urquhart & Sullivan has reportedly held talks with affected bondholders considering the launch of a class action against Credit Suisse.
The European Central Bank (ECB) has also weighed in, criticising the write-off in a joint statement alongside the Single Resolution Board (SRB), and the European Banking Authority (EBA).
Pointing to reforms recommended by the Financial Stability Board following the GFC, the European regulators stressed common equity instruments should be the first to absorb the losses of a troubled banking institution, before considerations of a wipeout of AT 1 capital notes.
“This approach has been consistently applied in past cases and will continue to guide the actions of the SRB and ECB banking supervision in crisis interventions,” the statement read.
“Additional Tier 1 is and will remain an important component of the capital structure of European banks.”
But common equity shareholders are set to recoup part of their investments in Credit Suisse, with UBS offering one UBS share for every 22.48 Credit Suisse shares, representing approximately CHF 0.76 (AU$1.22) per share.
In addition to the AT 1 write-off, Swiss regulators have also offered UBS a CHF 9 billion (AU$14.4 billion) loan covered by a federal guarantee, and has provided guarantees for potential losses of assets acquired by UBS as part of the transaction.
The takeover is not subject to shareholder approval, with the regulators pre-approving the deal to restore confidence in the Swiss banking system.
Credit Suisse shares plunged 55.7 per cent in the first day of trading following the announcement, closing trading on Monday (20 March) at CHF 0.82 (AU$1.3).
Meanwhile, UBS shares increased 1.2 per cent to CHF 17.3 (AU$27.7).
The UBS acquisition followed mounting concerns over Credit Suisse’s balance sheet strength, which was undermined by “significantly higher withdrawals” of cash deposits and non-renewal of maturing time deposits over the fourth quarter of 2022.
These outflows “substantially exceeded” the rates experienced in the previous quarter, up from AU$21 billion to AU$180 billion.
Investor sentiment later worsened off the back of three banking collapses in the United States, attributed to poor capital management exposed by aggressive monetary policy tightening.
