The AT1 Write-Down, 2023Medium

CHF 16bn of bank capital instruments written to zero while shareholders below them received stock. The week the creditor hierarchy turned out to be a document, not a law of nature.

4 min read · 768 words · Updated 4 Sep 2026

What happened

• Background — after 2008, regulators required banks to issue loss-absorbing capital that converts or writes down before taxpayers are touched. Additional Tier 1 (AT1) bonds are that instrument: perpetual, high-coupon, and designed to fail first.
• March 2023 — a US regional banking failure triggers a global loss of confidence. Credit Suisse, already weakened by years of losses and scandals, faces accelerating deposit outflows.
• 19 March 2023 — Swiss authorities broker an emergency acquisition by UBS over a weekend, using emergency powers to bypass the usual shareholder approval.
• The terms, announced that weekend in March 2023 — shareholders receive UBS stock worth roughly 3bn Swiss francs. Approximately 16bn francs of AT1 bonds are written down to zero on the same day.
• The reaction — the global AT1 market falls sharply the following Monday. European regulators issue a statement affirming that in their jurisdictions equity absorbs losses before AT1. Bondholders begin litigation in several jurisdictions.

The mechanism

• The write-down was contractual, not arbitrary. The Swiss AT1 documentation provided for a permanent write-down on a viability event — including extraordinary government support — and that clause did not require equity to be extinguished first. The terms said what happened; almost nobody had read them that carefully.
• Two different AT1 designs existed side by side. Some convert into equity (holders become shareholders); others write down permanently (holders get nothing back, ever). The market largely priced them as one asset class. They are not.
• The instrument was always designed to fail. A 9% coupon on a perpetual bond is not a generous yield on a safe asset — it is the market's price for a low-probability total loss. Run the expected-loss arithmetic: at 100% loss given default, that spread implies a real annual probability of exactly this event.
• Absolute priority is a default rule, not a guarantee. It governs bankruptcy. This was a resolution, executed under emergency powers, outside bankruptcy — and the hierarchy that applies is whichever one the governing documents and the resolution authority establish.
• The run itself was the modern part. Deposits left at a speed that the asset side could not match, the same mismatch described on the savings deposit page. Solvency ratios were being met while liquidity evaporated.

What it teaches

• Read the instrument, not the asset class. "Bank subordinated debt" describes a shelf, not a payoff. Trigger levels, write-down versus conversion, permanence, and the identity of the resolution authority are the product — and they differ between two bonds with identical descriptions.
• Jurisdiction is a term of the trade. The same instrument type under EU rules would likely have produced a different ranking outcome. Where a bank is resolved determines who decides, under what powers, and with what discretion.
• A high coupon is a probability statement. When an instrument yields several hundred basis points more than the issuer's senior debt, the market is quoting the chance of exactly the outcome the holder considers unthinkable.
• Regulatory reassurance is not a contract. The European statement that followed clarified intent within one framework; it did not and could not change the Swiss documents. Comfort from an authority you are not subject to is worth nothing.
• The instrument arguably worked. AT1 exists to absorb losses so that public money does not. It did that, at the price of destroying the market's confidence in the hierarchy — a genuine trade-off with no obviously correct side, and one worth holding both halves of.
• The same lesson recurs everywhere in this atlas. The economic payoff and the legal claim are different objects, and only the second one matters in a crisis: see sukuk, tracker certificates and FTX.

The mechanisms behind this

Every case on this site is an instrument or a mechanism doing exactly what it was built to do, in a situation nobody had pictured. These are the pages that explain the machinery:

• Contingent convertible bonds — the instrument itself: designed to absorb losses, and it did.
• Who gets paid along the way — the creditor hierarchy, and what it rests on when it is tested.
• How to read a term sheet — the viability clause was in the document; almost nobody had read it.
• How products fail — the pattern here — a contract that did exactly what it said.