The Swiss Job Undone: The Judicial Overturn of the Credit Suisse AT1 CoCos Write-Down

On October 1st 2025, the Swiss Federal Administrative Court overturned FINMA’s March 2023 decision to write down Credit Suisse’s AT1 Contingent Convertible (CoCo) bonds. The ruling came from a court of first instance and FINMA already announced that it will appeal to the Federal Supreme Court.

The original decision to write-down CoCos prevented a messy default by Credit Suisse and facilitated its merger with UBS. It was controversial for both its timing—very late in the crisis—and its form—which spared shareholders from total dilution, while imposing losses on CoCo holders. Yet the write-down of the CoCos marked an important discontinuity with the earlier experience, as it allocated, for the first time, losses to CoCo holders in a going-concern write-down. The economic benefit was, as intended in the legislation, a de facto bank recapitalization at a moment when open market recapitalization was impossible. Such was all along the goal of CoCos (Flannery, 2016; Martynova and Perotti, 2018). After the very costly 2008 UBS bail-out, Switzerland had championed CoCos in its prudential framework. While EU norms requiring a 5.125 % trigger are widely considered way too low and thus ineffective to support bank recovery, Swiss legislation on AT1 imposed a higher 7% trigger for CET1 over risk-weighted assets and a discretionary regulatory trigger designed to avoid any fiscal risk.

The court overturned the write-down on the ground that FINMA’s decision lacked adequate legal basis. In our view, the decision of the Swiss Court is overly formalistic and economically problematic. It fails to recognize the spirit of the Swiss banking law reform of 2012. It is likely to contribute to already severe forbearance incentives of bank supervisors world-wide, spanning well beyond the individual Credit Suisse case. In this column we briefly explain what the decision of the court does and does not say. Thereafter, we critically review the economic rationale of the decision to overturn the CoCo write-down and we map the potential consequence of increasing legal risk of tough supervisory decisions. 

1. The Decision of the Swiss Federal Administrative Court

In short, the court analyses FINMA’s power to write down CoCos on two grounds: 

1. The powers provided by the CoCo documentation—and specifically the ‘viability event’ included in the contract;
2. Other regulatory provisions empowering FINMA irrespective of the CoCo’s contractual design, including the powers provided by the ‘emergency ordinance’ passed in the immediate vicinity of the write down decision.

As for the latter, the court found that the regulatory provisions do not constitute sufficient legal ground to write down CoCos, as this would amount to an illegitimate expropriation.  In contrast, the court recognizes FINMA’s power to write down CoCos in the case of a ‘viability event’, without violating the pari passu principle nor investors’ property rights. However, it deems the ‘viability event’ not to have materialized in the case of Credit Suisse.

The Basel Accords do not require CoCos to include a viability event; this is a peculiarity of the Swiss implementation. The rationale for it is to make sure that FINMA has the power to intervene ahead of insolvency to safeguard taxpayers from bailout measures, which is difficult to do on the basis of accounting triggers only as they are inherently backwards looking. Indeed, Swiss law requires the write-down to takes place (a) before recourse is made to public assistance; or (b) if FINMA orders this to avoid insolvency. However, the way in which the ‘viability event’ is drafted in the documentation of the Credit Suisse CoCos is convoluted and ambiguous, making its enforcement problematic. So much so that the court acknowledges that it undisputably does not comply with the legal requirements. As a matter of prudential policy, it is at least questionable that contractual terms contrary to prudential rules should be considered a solid ground from overturning the write-down decision. 

However, the court decides to uphold the Credit Suisse ‘viability event’ clause as FINMA did not require its modification ex-ante and the investors relied on this version. The situation is clearly paradoxical: FINMA is not empowered to write down the CoCos given the contractual design written by Credit Suisse, but it would be empowered to do so if the same contractual design had complied with Swiss law. The logic of the legal decision therefore appears contrary to legislative intent. 

2. The Economic Rationale of CoCos vis-à-vis the Court Decision

We refrain from making specific arguments on the legal merit of the court’s decision, as we do not have expertise in Swiss law and it is beyond the scope of the current analysis. What appears quite clear is that the crucial factor is the definition of a legitimate trigger. We propose two arguments to show that the court’s interpretation is not in line with the economic rationale and legislative intent underpinning CoCos. 

First, the contractual formulation of the ‘viability event’ clause in the Credit Suisse CoCos reflects strategic contracting aimed at narrowing down the actual chance of a write-down to reduce their yield, by obfuscating FINMA’s ability to safeguard the bank solvency. This is a predictable outcome when the bank has discretion in defining the power of the authority (Martino and Vos, 2024). There are two takeaways: (1) the activation power by the supervisors should be firmly established, leaving no discretion in legal drafting by supervised banks; and (2) supervisors should carefully evaluate contractual clauses of capital instruments before their issuance, to ensure they reflect the legislative intent to avoid losing taxpayers’ money. 

Second, the court underlines that the ‘viability event’ clause solely empowers FINMA to write down the CoCos whenever support from the public sector is required for solvency. The court argues that the Swiss National Bank ‘only’ provided liquidity assistance, with no direct impact on Credit Suisse capital adequacy. In addition, the loss guarantee granted by the federal government in connection with the Credit Suisse-UBS merger did not qualify as a viability event either, according to the court, as it was granted to UBS, and not to Credit Suisse itself, as was required by the language of the clause in the CoCo documentation. For these reasons, FINMA’s decision to write down CoCos would have no legal basis. Such a formalistic interpretation of the clause makes no economic sense. At times of distress, liquidity and capital are indistinguishable from an economic perspective as they are inherently intertwined (Brunnermeier, 2009). Bank solvency primarily requires confidence in its capacity to deliver liquidity on demand. A run of the intermediary reflects a loss of confidence and thus a decrease in its economic capital. Most importantly, Credit Suisse and UBS received undercollateralized emergency liquidity assistance (ELA), exposing public funds to severe risk of loss. These measures are in immediate connection to Credit Suisse capital adequacy, whose safeguard is the key goal of the CoCo write-down. No formalistic reasoning can hide that ELA constitutes a fiscal commitment by the State to (partially) cover for a capital shortfall. CoCos should be triggered when the bank is unstable but can still recover, not when the bank is insolvent (which is the criterion for resolution). If the bank is solvent but too weak to withstand a run, and needs ELA with poor collateral, there is a risk of fiscal loss, and CoCos should be triggered. Such support proved essential to support the capital adequacy of Credit Suisse. Therefore, any form of public sector assistance under Swiss law should be considered the legitimate trigger for conversion.

A final legal argument of the court points to the fact that the bank was adequately capitalized at the time in which the liquidity support was granted. The use of a discretionary regulatory trigger was introduced precisely to enable a robust supervisory response, avoiding the severe delay caused by infrequent accounting reporting and the backwards-looking nature of accounting triggers. Most importantly, conversion of AT1 debt is intended as prudential measure to support bank recovery at a time of loss of confidence, when even compliance with minimum book equity requirements would not avoid insolvency. 

3. Supervisory Forbearance and Legal Risk

Beyond the case at hand, the decision of the Swiss court will have repercussion on supervisory activities world-wide. Supervisors have a tendency to forbear and delay actions, as they strive to minimize the public signal they send to the market with their decision, afraid of triggering panics and runs. Perotti and Martino (2025) discuss forbearance incentives driven by unclear mandates and weak triggers (as in the EU legislation on AT1). As a result, supervisors become reluctant to act even when circumstances indicate that a prompt corrective action is called for. 

Even though Credit Suisse suffered a clear loss of confidence and suffered a severe run in 2022, FINMA delayed its decision to act preventively until way too late from an economic perspective. Hesitation on the legal status of its power was a major cause. FINMA’s decision to trigger conversion only came after receiving reassurances from the emergency ordinance now overturned by the Swiss court decision. The court decision regrettably reinforces a key driver of supervisory forbearance. By interpreting supervisory powers through a formalistic lens, the ruling amplifies the supervisor bias towards forbearance. When decisive action carries not only political but also legal risk, hesitation becomes rational. 

The Credit Suisse saga reminds us that the cornerstone of a resilient financial system rests on regulatory and supervisory capacity supported by clearly designed powers and responsibilities. We must now restore the presumption that a legitimate conversion of any AT1 instrument should reflect its legislative intent rather than interpretation of contractual text compromised by strategic drafting.  

Edoardo D. Martino is an Associate Professor of Law and Economics, and Enrico Perotti is a Professor of International Finance at the Faculty of Law, University of Amsterdam.

Tom Vos is an Assistant Professor at the University of Maastricht and visiting professor at the Jean-Pierre Blumberg Chair, University of Antwerp.