Swiss government bond wipeout

Holders of $17.3 billion of Credit Suisse’s Additional Tier 1 debt will have their bonds wiped out as part of the state-backed takeover by UBS, triggering uproar across European debt markets


1 2011: Following Global Financial Crisis, Basel III reforms are adopted to absorb losses in banking sector

2 Regulatory capital: Shares and retained assets that can absorb losses are ranked Tier 1 and Tier 2
 
3 Risk-weighted assets: Method of measuring risk inherent in assets – typically bank’s loan portfolio

4 Basel rules: Measure risks in bank’s loan portfolio, other assets and off-balance sheet items
     

Loan portfolio 
Other assets
           
5 Riskier assets: Unsecured loans receive higher risk rate than collateralised loans, such as mortgages

6 Creditor hierarchy: If bank runs into trouble, Tier 1 shareholders usually rank below Additional Tier 1 (AT1) bondholders in terms of who gets paid
  

Credit Suisse shareholders and bondholders (Dec 2022)

Core Equity Tier 1 (CET1) $37.9bn
Additional Tier 1 $17.3bn
Tier 2 (T2) $52.8bn
$108bn

Swiss government ignores creditor hierarchy and imposes total losses on AT1 capital bonds. Will pay Tier 1 shareholders $3.23bn

            
Sources: Bloomberg, Financial Times, Investopedia, Reuters 
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