The Swiss regulators' decision to fully write down Credit Suisse's AT1 contingent convertible bonds (CoCos) during the bank's crisis was informed by the contractual characteristics of these instruments, notable for including loss absorption mechanisms with discretionary triggers. These features offered regulators sufficient leeway to bypass traditional conversion to equity in favor of a write-down, thus facilitating an expeditious reinforcement of the bank's core capital. Utilizing the discretion granted by the CoCos' terms ensured that regulators could execute a strategy that proactively supported Credit Suisse's capital structure in alignment with the urgent need to maintain the stability of the financial system.

A is incorrect. CoCos are designed with flexibility to accommodate different scenarios; the terms do not rigidly prevent actions other than a write-down.

B is incorrect. The pre-specified conversion rates did not explicitly mandate a write-down; the decision was based on the discretion provided within the regulatory framework.

D is incorrect. Although the terms permit conversion to equity, regulatory discretion enabled the decision to write them down to enhance the core capital immediately.

Things to Remember

• Contingent Convertible Bonds (CoCos) are hybrid securities that absorb losses in times of financial distress.
• CoCos have features such as loss absorption mechanisms and discretionary triggers to help regulators and issuers manage capital adequacy.