Bail-in Bonds and the Fall of Credit Suisse

What are Bail-in Bonds and What Do They Have to Do with the Collapse of Credit Suisse?

David Billeter, one of our partners, explores these questions in an article published in the Swiss Journal of Commercial Law (SZW).

Summary of the Article:

Following the financial crisis of 2007/08, the bail-in has established itself as the preferred resolution strategy for large banks throughout Switzerland and internationally. According to the concept, it is not the bank’s owners or the state that are to finance a resolution but the bank’s creditors. This is to be achieved by converting a certain type of debt called «bail-in-bonds» into equity capital. The (formerly two) major Swiss banks have issued bail-in-bonds in the amount of approximately CHF 50 billion each. These instruments are «structurally subordinated» and, since the recent introduction of the bail-in sequence in the Banking Act, also subordinated by law. Nevertheless, in the respective prospectuses the major banks explicitly refer to their bail-in-bonds as «unsubordinated». This article explores how the banks justify this designation and how it is that, even after the revision of the Banking Act, FINMA continues to approve it. In a second part the bail-in strategy is subjected to a critical appraisal. After 15 years of resolution planning and several public statements that a failing major bank in Switzerland would be resolved by means of a bail-in, the authorities have decided differently in the case of CS. Therefore, the bail-in is critically examined, taking into account the CS rescue, and selected aspects of the bail-in are shown that led to this resolution strategy not being used.