Credit Risk in Bank AT1 Bonds: Structural Vulnerabilities and the Shadow of the Suisse Collapse

The collapse of Credit Suisse in March 2023 and the subsequent write-down of $17 billion in AT1 (Additional Tier 1) bonds exposed a seismic crack in the perceived stability of these hybrid capital instruments. Once marketed as a reliable buffer for banks during distress, AT1 bonds now face scrutiny for their structural vulnerabilities, particularly their unpredictable treatment in crises. This analysis examines the implications of the Suisse case, regulatory responses, and the evolving risk landscape for investors in 2025.

Structural Vulnerabilities in AT1 Bonds

AT1 bonds were designed as perpetual, unsecured debt instruments that could be converted to equity or written down if a bank's capital ratio fell below predefined thresholds. Their role in the creditor hierarchy-ranking above equity but below senior debt-was meant to ensure shareholders absorbed losses first. However, the Credit Suisse case shattered this assumption. Swiss regulators invoked a "viability event" to write off AT1 bonds entirely, while allowing shareholders to retain partial value through the UBS takeover, according to GFM Review. This move defied contractual expectations and triggered a legal firestorm, with bondholders arguing that the write-down violated the principle of "absolute priority," as reported by IBTimes.

The structural flaw lies in the ambiguity of "viability events." While AT1 bond terms often include clauses permitting write-downs during government bailouts, the Suisse case demonstrated how regulators could interpret these provisions broadly, creating uncertainty for investors. A Yahoo Finance explainer highlighted the lack of standardized definitions for viability events across jurisdictions and how that has left AT1 holders exposed to arbitrary decisions. For instance, while European regulators reaffirmed traditional creditor hierarchies post-2023, Swiss authorities prioritized systemic stability over contractual clarity, as GFM Review notes. This inconsistency has eroded investor confidence, with many now questioning whether AT1 bonds can reliably absorb losses in future crises.

Regulatory and Market Responses

The fallout from the Suisse collapse prompted a wave of legal challenges. Reuters reported that hundreds of bondholders filed lawsuits against Swiss regulators, with cases pending at the Swiss Federal Supreme Court. Internationally, investors from Asia and the U.S. pursued arbitration under bilateral investment treaties, arguing that the write-down constituted a breach of fair treatment, according to Bratschi. Despite these challenges, the AT1 market showed surprising resilience in 2025. European banks issued over $45 billion in AT1 bonds during the first half of the year, driven by favorable pricing and strong demand for yield, per Acuity Knowledge Partners.

However, this resilience masks deeper concerns. A 2025 report by Acuity Knowledge Partners notes that while AT1 issuance has rebounded, investors remain wary of structural risks. For example, the introduction of "tender extender" models-allowing bonds to be refinanced before maturity-has provided temporary relief but does not address the core issue of unpredictable write-downs, a point raised by RBC Capital Markets. Meanwhile, regulators in Australia announced a phase-out of AT1s by 2032, citing their role in amplifying systemic risk, according to KPMG. In contrast, European and UK authorities continue to endorse AT1s as critical capital buffers, creating a fragmented global regulatory landscape.

Macroeconomic and Geopolitical Pressures

The 2025 market environment has been shaped by broader macroeconomic shifts. Central banks' signals of easing monetary policy and the Fed's 25-basis-point rate cut in September 2025 have driven investors toward higher-yield assets like AT1s, a trend highlighted by Sanctum Wealth. However, geopolitical tensions-such as the imposition of 10% baseline tariffs on EU imports-have added volatility, notes Lighthouse Canton. European banks, despite robust CET1 ratios (mid-teens in Q3 2025), face renewed scrutiny over their reliance on AT1s as loss-absorbing instruments.

Implications for Investors

For investors, the Suisse collapse underscores the need for rigorous due diligence on AT1 bonds. Key risks include:
1. Jurisdictional Arbitrage: The lack of a unified regulatory framework means AT1s issued in one country may carry higher risk than those in another.
2. Trigger Ambiguity: Vagueness in viability event definitions leaves room for regulatory discretion, increasing the likelihood of unexpected write-downs.
3. Liquidity Shocks: The Suisse event triggered a sell-off in AT1 markets, with spreads widening as investors fled perceived risk.

While AT1s remain attractive for their yield, investors must weigh these risks against alternatives like senior unsecured debt or equity. As Lighthouse Canton observed, the market's focus on yield in 2025 may mask long-term vulnerabilities, particularly if another crisis tests the durability of these instruments.

Conclusion

The Credit Suisse collapse has irrevocably altered the perception of AT1 bonds. What was once a cornerstone of bank capital structures is now viewed through the lens of regulatory arbitrage and structural fragility. While 2025 has seen a rebound in issuance, the underlying risks remain unresolved. Investors must navigate a landscape where contractual protections are no longer sacrosanct, and regulatory priorities can override market expectations. As the legal and regulatory debates continue, the future of AT1s will hinge on whether reforms can restore clarity-or whether the Suisse precedent will cast a long shadow over the banking sector.