Why the AT1 Judgment Shakes the System – Beyond Credit Suisse

Why the AT1 Judgment Shakes the System – Beyond Credit Suisse

The decision by Switzerland’s Federal Administrative Court to overturn Finma’s write-down of Credit Suisse’s AT1 bonds reopens old wounds and creates new uncertainties. Yet, as finews.asia editor Peter Kuster argues, the ruling ultimately sends a healthy signal – one that strengthens property rights and warns against the casual use of emergency powers.

Was it really necessary? Could – or should – the Federal Administrative Court (FAC) have ruled differently, in the interest of state stability?

According to Tuesday’s ruling, Finma lacked a sufficient legal basis when it declared Credit Suisse’s Additional Tier 1 bonds, worth 16.5 billion francs, worthless in March 2023. FAC found that neither the bond terms, the banking and supervision laws, nor the emergency ordinance of the Federal Council – which it incidentally declared unconstitutional, could justify the move.

Old Wounds, New Uncertainties

The court therefore annulled Finma’s decision but stopped short of clarifying who must now compensate whom – UBS as Credit Suisse’s successor, Finma, or the federal government – and how much. That question will likely be settled by the Federal Supreme Court, as Finma has already announced an appeal.

With its 78-page judgment, the FAC has reopened painful memories and injected uncertainty for UBS, regulators, and possibly the Swiss taxpayer. It recalls the dramatic March weekend in 2023 when Swiss authorities, through a mix of emergency liquidity and guarantees, averted what could have become a global financial crisis.

A Crisis Averted – At a Price

In hindsight, Switzerland’s emergency intervention worked. The taxpayer did not lose a franc, the UBS–CS merger has been relatively smooth, and the country’s financial reputation recovered faster than feared. A parliamentary inquiry shed light on the affair, and the episode seemed closed.

So, is the FAC now «stabbing the government in the back», as some headlines suggested? Not quite.

Crossing the Red Lines of 2023

The success of the Credit Suisse rescue cannot hide the fact that Swiss authorities overstepped several boundaries. The «too big to fail» regime – painstakingly crafted after 2008 – proved ineffective.

The Swiss National Bank, following a Federal Council order, extended up to 100 billion francs in unsecured loans, effectively bypassing its own legal framework. And the federal government invoked emergency law for yet another 100-billion guarantee.

The Finma Shock and Market Fallout

Finma’s move to fully write off AT1 instruments shocked investors and temporarily froze the market for such hybrid bonds – a market that regulators themselves had once promoted after the UBS bailout.

Compared with 2008, when the authorities stabilised the system through a more elegant emergency solution, the 2023 approach looked improvised and legally fragile.

Lessons Not Learned

The same institutions that managed the 2008 crisis – the Finance Ministry, Finma, and the SNB – were still in charge in 2023. They had 15 years to prepare for another emergency.

Yet, faced with an isolated case in Credit Suisse, they again reached for emergency decrees, crossing legal and operational red lines. The FAC has now reminded them that success does not justify every method.

Signal for Property Rights – and Against Abuse of Power

Beyond the technicalities, the ruling sends a powerful message: Switzerland upholds property rights, regardless of so-called higher interests. That is what defines a rule-of-law state – one that protects individual freedoms from opportunistic reasoning.

Equally important is the court’s stance on emergency powers: they must remain a last resort, not a political convenience.

What Comes Next – and Who Pays

The FAC may yet overturn the ruling. The Lausanne judges are generally more state-oriented than their St. Gallen counterparts – as seen in 2011, when they allowed UBS client data to be handed to U.S. authorities despite serious privacy concerns.

For now, UBS seems the loser. But since the bank would likely never have agreed to acquire Credit Suisse without the AT1 wipeout, it is improbable that it will bear major costs. Should the Supreme Court uphold the FAC’s decision, the bill could end up with the federal government – and thus the taxpayer.

Subtle Advantage for UBS

Ironically, the verdict could still strengthen UBS in its ongoing regulatory tug-of-war. By curbing the power of Finma and the Finance Ministry, the court may have tilted the balance in UBS’s favour as it negotiates future capital rules for Switzerland’s last global systemically important bank.

The FAC’s decision may unsettle markets and reopen debates Switzerland thought it had closed. But in defending the rule of law and property rights, it restores a crucial balance – reminding everyone that even in crisis, legality must not be sacrificed on the altar of expediency.