Could it Happen in the EU? An Analysis of Loss Distribution between Shareholders and AT1 Bondholders under EU Law

In March 2023, the Swiss bank Credit Suisse’s so-called Additional Tier 1 (AT1) bonds were written down to facilitate the bank being taken over by UBS, its national rival. Ensuing discussion and market reactions went well beyond Swiss borders, as the write-down was completed without Credit Suisse’s shareholders first being wiped out, thereby deviating from the principle that shareholders bear losses ahead of all other investors. This article asks whether such an outcome is possible under EU law. A comprehensive analysis demonstrates how this question is governed by the combined operation of contractual clauses and the resolution authority’s statutory powers. Combining applicable EU law with empirical analysis of contractual terms employed by EU banks issuing AT1 bonds and their capital requirements, the article argues that an outcome akin to that of the Credit Suisse write-down is unlikely for EU banks. Building on this analysis, it is shown what reform is needed if EU policymakers consider it desirable to have AT1 bonds absorb losses outside of cases requiring intervention by the resolution authority.