Credit Suisse failure weakened bail-in credibility, BIS finds

The study analyzed bond-level data from 94 European banks in 22 countries, tracing the repricing of AT1, bail-in, and senior debt following the Credit Suisse failure in March 2023.

Researchers found that AT1 spreads moved in line with jurisdiction-specific regulatory signals: rising by 11 percent in Switzerland where AT1 was fully written down, and falling by 5 percent in the Eurozone and UK after hierarchy clarifications.

Crucially, bail-in spreads tightened across all jurisdictions, proportionally more than AT1 spreads, consistent with markets assigning a lower probability to bail-in.

For instance, Eurozone bail-in spreads declined by 13 percent against a 5 percent AT1 decline.

This repricing suggests a re-evaluation of how losses are distributed in a crisis, rather than an overall increase in default risk, as senior spreads remained largely unchanged.

Lower-rated banks experienced larger spread declines, and investor responsiveness to firm-specific disclosures decreased, indicating reduced market discipline.

The resolution framework for global systemically important banks (G-SIBs) was designed to ensure private creditors absorb losses, not taxpayers.

The failure of Credit Suisse (CS) in March 2023 presented the first major test of this framework.

Despite a resolution plan being in place, Swiss authorities opted for a different path due to financial stability concerns, facilitating a takeover by UBS, backed by public guarantees.

In this process, Additional Tier 1 (AT1) bonds were fully written down, while bail-in creditors, who would typically bear losses next under a formal resolution, were left whole.

This decision sent new signals to bank debt investors across Europe and prompted EU and UK authorities to issue clarifying guidance on AT1 treatment in their respective jurisdictions.