Credit Suisse AT1 Write-Down (2023) — The Capital Hierarchy Inverted

AT1 (Additional Tier 1) is the lowest-ranking form of regulatory capital in a bank's capital structure. Under the Basel III framework, bank capital falls into three layers: CET1 (Common Equity Tier 1, the core buffer) — Tier 1 capital (including AT1) — Tier 2 capital (subordinated debt). Below all of that sit senior debt and deposits.

AT1 looks like a bond. It has a coupon, a call date, and trades on exchanges. You can check its price on Bloomberg, and it has an ISIN. But its legal nature is capital. When a bank is in distress — or when its regulator determines it is no longer viable (Point of Non-Viability, PONV) — AT1 is designed to absorb losses. The principal can be fully or partially written down, or forcibly converted into equity.

Why do banks issue AT1? Because it is cheaper regulatory capital than equity. For investors, AT1 offers higher coupons than senior debt, with the perceived comfort of ranking above equity. Markets had accepted this structure for years because the loss-absorption provisions had never actually been triggered — until March 19, 2023.

On the morning of Wednesday, March 15, 2023, the chairman of Saudi National Bank — Credit Suisse's largest shareholder — said publicly that no further capital support would be forthcoming. Market sentiment, already fragile, collapsed immediately. CS shares fell more than 25% in a single day; CS CDS spreads (the cost of default insurance) blew out by hundreds of basis points. A bank run began.

Thursday, March 16: The Swiss National Bank provided a CHF 50 billion emergency liquidity backstop to CS. Markets oscillated between relief and skepticism. But deposit outflows did not stop.

The weekend of March 17–18: Emergency negotiations proceeded between Swiss authorities (FINMA, SNB, the government) and UBS. The terms came together quickly: UBS would acquire CS for CHF 3 billion. But a critical question hung over the talks — what would happen to the AT1 bonds?

Sunday night, March 19: The announcement: UBS acquires CS at 0.76 CHF per share (CHF 3 billion total). And CHF 16 billion of AT1 bonds written down to zero. Equity survived. AT1 did not.

Finance has a foundational principle: claims higher in the capital structure are protected before claims lower down. Equity is the most junior — it absorbs losses first when a company fails. AT1 sits just above equity. Therefore, in theory, AT1 cannot be wiped out before equity goes to zero.

On March 19, exactly that happened: AT1 was written to zero while CS shareholders received 0.76 CHF per share in UBS stock.

How was this possible? The answer was in the prospectus.

Credit Suisse's AT1 indentures contained a PONV clause tied to Swiss law (FINMA authority): upon FINMA's determination that the bank was no longer viable, the full principal of AT1 bonds could be written down to zero automatically. This provision was drafted to operate regardless of whether equity was protected.

EU and UK AT1s generally work differently — equity must absorb losses first under those frameworks. Switzerland was distinct. Many investors in CS AT1 had not fully internalized this difference, which became clear through the subsequent wave of bondholder litigation.

When markets opened on Monday, March 20, the global AT1 market reacted immediately. Spreads on AT1 bonds issued by major European banks blew out 100–200bp. Some AT1s fell to 70–80 cents on the dollar.

Investors had one question: "Does my AT1 have the same provision?"

The ECB, the European Banking Authority (EBA), and the UK's PRA all issued emergency statements the same day. The message: EU and UK AT1s operate differently from Swiss ones. The standard capital hierarchy holds — equity must absorb losses before AT1 can be written down.

These statements provided some stabilization, but full normalization took weeks. Global FIG AT1 spreads reset structurally wider after this event, as the market re-priced the legal risk embedded in the instrument.

A secondary shockwave: AT1 bonds issued by Asian and Middle Eastern banks also came under scrutiny. Investors began studying jurisdictional differences in PONV language across prospectuses — work that, for many, should have been done before the investment.

The central lesson of the CS AT1 episode is, ironically, not complex: read the prospectus.

The CS AT1 indentures contained a full write-down PONV provision, and Swiss law gave FINMA the authority to enforce it. This was not hidden — it was in the offering document. For investors who had fully understood that provision, the March 19 outcome was legally foreseeable.

In practice, however, many institutional investors had relied on market convention reasoning: "AT1 ranks above equity, so as long as equity gets something, I'll be fine." They had not sufficiently accounted for the fact that Swiss AT1 operated differently from that convention.

This event imprinted three lessons on the market. First: AT1 is not a bond — it is a capital instrument that happens to trade like one. Second: without understanding the specific PONV language and the applicable jurisdiction's regulatory powers, any AT1 investment is made on incomplete information. Third: "this is how it's always been done" is the most expensive assumption in capital markets.

The AT1 primary market reopened after this event. Investors keep coming because the coupons remain attractive. What changed: more of them now read the contract first.