A Swiss court on Tuesday declared unlawful the decision to write off 16.5 billion Swiss francs ($20.53 billion) in Credit Suisse bonds during the bank’s emergency takeover by UBS, handing a major legal victory to investors who had accused authorities of acting without due process.
The ruling by Switzerland’s Federal Administrative Court struck at the heart of the controversial 2023 rescue engineered by the Swiss government and financial regulator FINMA, which shocked markets when it wiped out Credit Suisse’s Additional Tier 1 (AT1) bondholders while still compensating shareholders. The court said the move violated bondholders’ property rights, as it lacked a “clear and formal legal basis.”
The landmark judgment — which FINMA and the finance ministry said they are now reviewing — could expose Switzerland’s banking authorities and UBS to years of litigation and potential compensation claims running into billions.
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A Blow to Swiss Regulators
FINMA’s unprecedented decision last year to erase the AT1 bonds stunned global investors and triggered widespread accusations that Switzerland had undermined the very principles that made its financial system a global haven. Regulators effectively reversed the traditional capital hierarchy in banking law by prioritizing shareholders over bondholders.
“It considered that the bondholders’ property rights were seriously interfered with, which would have required a clear and formal legal basis. But no such basis existed,” the court said.
The decision sent UBS shares tumbling more than 3.5%, as investors digested the potential financial and regulatory fallout. UBS, which has since absorbed Credit Suisse’s assets and liabilities, faces tougher post-merger capital rules that may now become more politically charged.
Peter V. Kunz, a business law professor at the University of Bern, said the court’s decision could force the re-issuance of the bonds after what he predicted could be a six-year legal process.
The 2023 Shock and Its Aftermath
When Swiss authorities brokered UBS’s takeover of Credit Suisse in March 2023, they justified the AT1 write-off as necessary to stabilize the financial system. At the time, Credit Suisse was teetering on the brink of collapse amid a crisis of confidence and massive deposit withdrawals following years of scandals, losses, and poor governance.
Under the terms of the emergency merger, Credit Suisse shareholders received UBS stock worth about $3.25 billion, while AT1 bondholders were left with nothing — a move that broke with global norms.
The decision triggered more than 3,000 complaints from investors in around 360 separate cases, as law firms mobilized to challenge FINMA’s decree both in Switzerland and abroad. Some investors even sought redress under bilateral treaties through investor-state arbitration.
The bonds in question — AT1 instruments introduced after the 2008 financial crisis — were designed to absorb losses when a bank’s capital fell below certain thresholds. But investors argued that the conditions for a total write-off were never met and that FINMA overstepped its authority.
Global Financial Implications
The case has become a test of investor confidence in the Swiss legal and regulatory system, which had long been viewed as one of the most predictable in the world.
“The decision is a step to restore investor confidence in the Swiss legal system,” said Zurich-based lawyer Jonas Hertner, who has represented Credit Suisse AT1 bondholders. “Under Swiss law, expropriation requires full compensation. This decision essentially holds that bondholders were expropriated.”
While analysts expect FINMA and UBS to appeal to Switzerland’s Supreme Court, the ruling has already reverberated through the global banking industry. Regulators in the European Union and the United Kingdom, keen to avoid similar market turmoil, were quick last year to reaffirm that in their jurisdictions, shareholders would always take losses before bondholders.
Even if investors ultimately prevail, analysts warn that compensation may fall far short of the nominal CHF 16.5 billion.
“The repayment, if an appeal is unsuccessful, could be much less than the full 16 billion, as the market value of the bonds was much less than their nominal value at the time of the rescue,” said Hans Gersbach, a banking and economics professor at ETH University in Zurich.
Still, the court’s finding that Swiss authorities lacked a legal basis for their action is likely to reshape how the country manages future bank crises. It could also embolden bondholders in similar disputes globally, where governments have intervened heavily in the financial sector.
As UBS continues integrating Credit Suisse’s operations, the specter of renewed litigation adds to the challenges facing Chief Executive Sergio Ermotti, who has sought to portray the merger as a strategic success.
However, the ruling leaves Switzerland’s financial establishment facing an uncomfortable reckoning — one that reopens wounds from a crisis that authorities had hoped was firmly in the past.
