March 2023: FINMA ordered Credit Suisse's CHF 16 billion of Additional Tier 1 bonds written to zero as part of the UBS rescue — while shareholders received CHF 3 billion. Bondholders wiped out, equity holders paid: the capital-structure order inverted in a weekend. Hong Kong private-bank clients, who had bought AT1s as "senior-ish yield", were among the hardest hit.
1. What AT1s are supposed to do
Additional Tier 1 capital instruments sit between equity and senior debt: they absorb losses before senior creditors but after equity. That ordering — equity first, then AT1, then senior — is the design assumption buyers paid for.
| Layer | Expected order | What happened at CS |
|---|---|---|
| Equity | First loss | Received CHF 3bn in UBS shares |
| AT1 | After equity | Written to zero first |
| Senior debt | Last | Largely untouched |
2. Legal basis vs market expectation
Both things are true at once: the write-down was lawful (AT1 terms allowed it at a "viability event", and Swiss emergency law designated the takeover as one) and shocking (the market's lived expectation was that equity absorbs losses first). The instrument worked as documented — and repriced every AT1 globally anyway.
3. Why Hong Kong felt it
- Private banks had distributed CS AT1s to "professional investors" as yield instruments — the product performed as designed, and clients still lost 100%.
- HKMA moved fast to reassure: Hong Kong AT1s are issued under Cap. 628 with clearer ordering — but the demonstration effect was already done.
- It exposed the retail-adjacent distribution of instruments whose entire purpose is to be sacrificed in a crisis.
RegSir's take
AT1s are designed to die — that's their function. The scandal isn't that they were written down; it's that they were sold to people who didn't know they could be. The suitability question is identical to NWD's perps: PI-classified clients were distributed loss-absorption instruments as yield products. Cap. 628 gives Hong Kong's resolution authority the same power — and the honest answer to "could it happen here" is "that's what the instrument is for". If your compliance story for an AT1 sale is "the client signed the PI form", you haven't done suitability — you've done paperwork.
4. Compliance takeaways
- Loss-absorption products need positive disclosure: not "may be written down" in the prospectus — "you may lose everything even while shareholders get paid" in the pitch.
- HK regime comparison: Cap. 628 ordering is clearer, but the power exists — suitability work can't rely on jurisdictional comfort.
- Distribution-channel risk: private-bank incentive structures pushed yield product; the AT1 episode is a case study in why product governance belongs with the distributor, not just the issuer.
5. Official sources & reporting
| Document / report | Link |
|---|---|
| FINMA — Credit Suisse takeover decree (2023.03.19) | finma.ch ↗ |
| FIRO Cap. 628 — Hong Kong resolution regime | elegislation.gov.hk ↗ |
| HKMA — banking stability communications | hkma.gov.hk ↗ |