Credit Suisse and the AT1 bond write-off: Francesco Franzoni's opinion in the Wall Street Journal

Credit Suisse AT1 bond write-off upends European bank capital bonds. Designed to convert into equity when a lender runs into trouble, AT1 bonds gained popularity with investors because they carried high yields during the past decade of low interest rates. “Whenever they pay you a high return, you have to be careful about what is behind it,” says Francesco Franzoni Full professor at the Faculty of Economics and the Institute of Finance (IFin), Università della Svizzera italiana, in an interview with the Wall Street Journal.

Holders of risky Credit Suisse debt got nothing in the takeover of the bank by its rival UBS. The Swiss financial market supervisory authority Finma said that the deal would trigger a “complete writedown” of the value of all of the bank’s AT1 (Additional Tier 1) bonds. These instruments were introduced after the 2008-09 financial crisis as “regulators wanted better-capitalized banks”, said prof. Francesco Franzoni. “AT1s were created as a new avenue to increase banks’ capital”, that is banks’ safety buffers that banks can deploy in times of stress without tapping taxpayers funds.

Sometimes called contingent convertible bonds, or CoCos, such securities can be written down or converted to equity if a bank’s capital levels fall below requirements, depending on the terms of bonds issued by individual banks. This helps to reduce debts, while providing the bank a capitalization boost. They were attractive to investors because, while relatively risky, they carried high yields during a decade of low, and sometimes negative, rates. “Whenever they pay you a high return, you have to be careful about what’s behind it,” said Prof. Francesco Franzoni. “Investors were not discerning enough—or they trusted their bankers.”