Parties on opposing sides continue to stake out battle lines over the write-off of Credit Suisse's AT1 bonds. The head of the Swiss National Bank has now drawn the SNB's position.

Following the controversial decision on March 19 instructing Credit Suisse to fully write down around $18 billion of AT1 bonds as part of its government-mandated takeover by Credit Suisse, consternation, bafflement, and outrage followed.

The Swiss National Bank, financial regulator Finma, and the federal government moved to write off the bonds through emergency legislation. The contingent convertible bonds were created following the 2008 financial crisis, and in Switzerland are designed to be written down or converted into hard-core capital before the affected bank's equity is completely depleted or written down.  

Outraged bondholders have initiated lawsuits, including against Finma saying they should have been made whole before those with an equity stake. As finews.com reported, one US law firm has lined up over a thousand plaintiffs in a class action suit against Finma.

Read the Fine Print

On March 23, Finma defended the decision, saying that Credit Suisse received an extraordinary liquidity grant. Moreover, the Swiss Federal Council enacted an emergency ordinance (PLB-NVO) on additional liquidity assistance loans and granted federal default guarantees for liquidity assistance loans of the Swiss National Bank (SNB) to systemically important banks. Given that, Finma said it had the authority to order Credit Suisse to write off the loans.

Now the chairman of the Swiss National Bank's Governing Council, Thomas Jordan, is weighing in. According to a «Bloomberg» (behind paywall) story, Jordan said at a symposium at the University of St. Gallen on Friday that  AT1 investors should have been aware of the risks.

«In the AT1 issue the legal setup was very clear,» Jordan said. «It is not something where investors can say it was not foreseen to be used under those circumstances,» he said according to the report.

No doubt more battle lines will be drawn, but it looks like both sides will have their day in court.