On 6 June 2025, the Swiss Federal Council published proposed amendments to the Swiss Capital Adequacy Ordinance, including „more precise information on the term and suspension of interest payments for AT1 capital instruments.“ The authors question the necessity of these changes and warn against using opaque terms and „hard triggers“ without any exemptions.
On 6 June 2025, the Swiss Federal Council published key parameters for amendments to Swiss law and ordinances, which will be submitted for public consultation in stages and aim to improve the too-big-to-fail framework and reduce risks for the state, taxpayers, and the economy. Among the first proposed amendments published for consultation (open until 29 September 2025) are provisions that have the following claimed purpose: „The duration and the suspension of interest payments for AT1 capital instruments are […] defined in more detail.“
As of today, in implementing the Basel III international regulatory framework for banks, the Swiss Capital Adequacy Ordinance (CAO) – and as to certain aspects the Ordinance on the Trading Book and Banking Book and Eligible Capital of Banks and Securities Firms (TBEO-FINMA) – already set forth the requirements that instruments must meet in order to qualify as additional tier 1 (AT1) regulatory capital. These requirements include, amongst others, that the instrument must (i) be paid-in in full, (ii) convert or be written-down at pre-defined capital ratios (when falling below 5.125% CET1 relative to the risk-weighted assets (RWA) – for systemically relevant banks this trigger is set at 7% CET1/RWA) or at the latest at the point of non-viability, (iii) be perpetual with a mere voluntary redemption no earlier than five years after issuance and only after approval by the Swiss Financial Market Supervisory FINMA (FINMA), (iv) have no features that make it difficult in any way to increase the bank‘s capital, (v) provide for mere voluntary interest payments and only if sufficient distributable reserves are available, and (vi) provide that distributions to the holders of the instrument must not increase during the term of the instrument due to the issuer-specific credit risk.
Regarding the perpetual nature of AT1 instruments and the required FINMA approval for any voluntary redemption or (as it has the same economic effect) repurchase (referred to herein and in the CAO generally as a „repayment“) thereof, the CAO explicitly requires that the bank must not, at the time of issuance of any such instrument, create any expectation of repayment or of FINMA approval of repayment. Additionally, the bank must, at the time of issuance, disclose that FINMA will not approve repayment unless the bank‘s remaining capital would continue to meet regulatory requirements or sufficient replacement capital of at least equal value is issued by the bank. These disclosure requirements are typically addressed in the instrument-specific risk factors set out in the prospectus used for the offering. Notably, the CAO does not tie the hands of FINMA by stating that FINMA must give approval for repayment if the two stated requirements are met. This is in line with the nature of the instruments, which are designed to be, in principle, perpetual.
While the Basel III international regulatory framework for banks and the CAO set out specific requirements for AT1 instruments, the terms and conditions of AT1 instruments issued by (most) Swiss issuers go into much greater detail in order to contractually implement, and ensure compliance with, those requirements. FINMA must approve the terms and conditions of each AT1 instrument prior to any issuance.
Swiss regulations implement the Basel III framework into Swiss law and have been assessed as „compliant“ with respect to risk-based capital in the Basel Committee‘s Regulatory Consistency Assessment Programme (RCAP) jurisdictional assessments on regulatory implementation consistency (accessible at: https://www.bis.org/bcbs/implementation/rcap_jurisdictional.htm).
The amendments to the CAO – or the addition of more details as the Swiss Federal Council describes it – proposed with respect to AT1 instruments on 6 June 2025 are as follows:
– Perpetual nature and voluntary redemption:
The CAO in its current form requires the bank to disclose at the time of issuance of an AT1 instrument that FINMA will approve repayment only if the bank‘s remaining capital would meet regulatory requirements or if sufficient replacement capital of at least equal value is issued by the bank.
The proposal would amend this to require the bank to disclose at the time of issuance of an AT1 instrument that (i) as a general rule, there will be no repayment, and (ii) any repayment requires the approval of FINMA. In addition, FINMA will be permitted to approve any such repayment only if (a) the remaining equity capital of the bank will exceed the requirements under articles 41 – 45a CAO „on a sustained basis,“ or (b) sufficient own funds of at least equal value are issued by the bank as a replacement and, in such case of a replacement issuance, either (x) the replacement issue „significantly reduces the interest costs“ (the explanatory report refers to the credit spread) borne (as compared to the AT1 instrument to be repaid) by the bank, or (y) the bank can demonstrate the regulatory need to adjust the terms and conditions of the relevant AT1 instrument to be repaid. In the reading of the authors, test (b) would apply whenever a voluntary redemption is intended to occur simultaneously with the issuance of a new (replacement) instrument, while test (a) would apply when a bank is looking to repay AT1 instruments held in excess of the required amount.
In the authors‘ view, the proposal introduces several unnecessary and opaque concepts by referring to a sustained basis and a significant reduction in the interest costs. For example, it is not clear from the proposal how the significant reduction in interest costs is established in the case of AT1 instruments issued in different markets and currencies and/or whether swaps are also taken into account. Introducing such vague terms could create uncertainty – a status universally recognized as not ideal in capital markets – around what is actually required in order for a bank to meet these new conditions to approval of repayment. Similarly, it is unclear whether a new AT1 instrument that is issued several months before an intended repayment of an outstanding AT1 instrument (as is oftentimes the case) would still be treated as a replacement issue for purposes of test (b) above, or whether it would be treated as part of the remaining capital for purposes of test (a) above. In addition, the market will, as a general rule, not be informed by FINMA or the relevant bank as to why – or even when – FINMA has withheld its approval for any repayment. Nevertheless, if the proposal is adopted in its current form, a Swiss issuer’s decision not to redeem an AT1 instrument at the first available call date—regardless of the underlying reason—could inadvertently signal to the market that FINMA considers the bank’s capital requirements not to be met on a sustainable basis or that the credit risk of the relevant banking group might have increased. This implication may arise even if such concerns are unfounded and irrespective of whether the bank has sought FINMA’s approval for the redemption. Both messages would not be ideal for the bank and could unintentionally trigger a downward spiral. The Swiss Federal Council seems to have generally reflected on this issue and states in the explanatory report that „then, even in a crisis, it will be possible to forego a costly renewal of these instruments without sending out an extraordinary signal of weakness and thereby stigmatizing the institution“ and that the „aim is to ensure that the market must expect that repayment will not normally be made. This means that non-repayment will in no way send a negative signal about the bank‘s condition.“ In the authors‘ view, it is far from certain or even likely, that the desired aim is reached by the proposed text. Knowing how easily negative signals can spiral into broader instability (the initial bank run on Credit Suisse in the fall of 2022, for example, was sparked by a single blogger), this is a highly sensitive matter. It demands prudent and deliberate evaluation of potential market reactions—and certainly does not warrant experimental approaches.
In this context, it is also worth noting that the proposed amendments would create additional ways in which the Swiss regulations deviate from the European regulations on AT1 instruments, notably, article 78 of the European Capital Requirements Regulation (CRR). Given that the European institutional market is a very important market for placing AT1 instruments issued by Swiss issuers and that Swiss issuers generally compete with international, including European, issuers for the same AT1 investors, the Swiss rules should not differ substantially from those applicable to European AT1 issuers, as this could worsen conditions for the Swiss issuers and put them at a competitive disadvantage in comparison to their European peers. Unclear or surprising provisions are generally problematic for AT1 investors, as such provisions are difficult for investors to reflect in their valuation models.
Rather, in the view of the authors, Switzerland should follow its tradition and initiate discussions on this topic at an international level in the BCBS and, ultimately, implement what the international consensus considers to be the right thing to do.
– Payment of interest/coupons:
In its current form, the CAO requires that AT1 instruments provide for voluntary interest payments, which may be made only if sufficient distributable reserves are available. If distributable reserves are lacking, or if FINMA prohibits interest payments for any reason – as is stipulated in most terms and conditions of existing Swiss AT1 instruments – no interest payments may be made.
According to the proposed amendments, the bank would also have to, at the time of issuance of an AT1 instrument, disclose (presumably also in the prospectus used for the offering, e.g., in the risk factors section) that distributions to the holders of the instrument by the bank are only voluntary and will be made only if sufficient distributable reserves are available (as in the existing framework) and the sum of the profits of the previous four quarters is positive.
By this proposal, the Swiss Federal Council appears to be introducing some kind of „objective coupon stopper.“ FINMA must order the suspension of distributions to holders of AT1 instruments if any of the specified conditions (i.e., distributable reserves are available, and the sum of the profits of the previous four quarters is positive) are no longer met. It is not even clear whether the profit of the bank on a stand-alone basis or on a consolidated basis is relevant for these purposes. Furthermore, the proposal also states that, in justified cases, FINMA may order such a suspension earlier (i.e., while both of the specified conditions continue to be met). If such a suspension has been ordered because any of the conditions have not been met, once the relevant bank once again meets such conditions, the proposal states that FINMA shall authorize the resumption of (non-cumulative, of course) distributions, except in „justified cases.“ According to the proposal, a justified case will exist, in particular, if a deterioration in the bank‘s capital situation becomes apparent. However, that is just an example and there is not an exhaustive list of situations that will constitute a „justified case,“ which determination is ultimately left to FINMA‘s discretion.
In the authors‘ view, the substance of the AT1 instruments and the existing rules on when interest payments may be made (under which FINMA can prohibit the payment of interest in its regulatory discretion) are not changed by the proposal. Again, by amending the CAO to include specific situations in which FINMA must prohibit interest payments, a clear „messaging“ is sent to the market as to the causes whenever a bank ceases making interest payments on its AT1 instruments. Or even worse, the vague concept of allowing FINMA to order the prohibition earlier „in justified cases“ could lead to market speculation on the well-being of the bank in question. It is, accordingly, not clear what benefit the proposed changes would bring, other than for FINMA the reduction of the circumstances in which it has to exercise its discretion. This reduction in discretion comes with a downside: (i) certain investors may not, or may not be allowed to, invest in AT1 instruments at all if there are hard-wired net-loss triggers for interest cancellation, (ii) rating agencies may reduce the instrument-specific rating for AT1 instruments that have these net-loss triggers, (iii) investors may request higher interest payments as „compensation“ for these net-loss triggers, thereby making the issuance more expensive (which may, in turn, have a negative impact on the permissibility to repay outstanding instruments (see above on the required significant reduction in the interest costs)), and/or (iv) forcing FINMA‘s hand in certain situations may similarly result in „too clear“ messaging to the market – especially in situations where it may be better not to „add fuel to the fire.“
But even if one were to take the view that some kind of objective coupon stopper would be a net positive, it is questionable whether the proposed additional test (i.e., the sum of the profits of the previous four quarters is positive) is the right one. On the one hand, many banks do not publish quarterly reports. On the other hand, changes in accounting, new investments, the implementation of a new strategy, and other developments that are not triggered by signs of a bank‘s reduction in general profitability can impact the short-term (four quarters) profit of a bank while still being wise/necessary management decisions or legally required changes, as the case may be, and, ultimately, positive for the bank (from both a profit and general perspective) in the mid- or long run. In such cases, hard-wiring a coupon-stopper does not seem justified or even sensible. As can be seen from past RCAP reports, the absence of hard-wired stoppers in existing regulation was intentional and defended by FINMA. It would, therefore, be wise to leave FINMA‘s discretion as is or to change the proposal in such a way so that FINMA could still exercise its discretion to abstain from prohibiting interest payments in a specific case.
As a consequence of all the points raised above, it is the authors‘ view that changing the rules applicable to AT1 instruments – even if they do not change anything in substance (under the rules currently in effect, the instruments already are perpetual and may only be redeemed with FINMA approval; interest payments are voluntary and must be stopped if FINMA so orders) – may reduce investors‘ appetite to invest in AT1 instruments of Swiss banks specifically or may increase the funding costs of Swiss banks. The introduction of „hard triggers“ and opaque terms is likely to only exacerbate this effect. Such a result would run counter to the fundamental idea of having well-capitalized Swiss banks with loss-absorbing going-concern debt capital in high quality in addition to their common equity tier 1. This effect can, in the authors‘ view, only be mitigated if the relevant changes are made in the Basel III framework and become the new international norm.
It remains to be seen what views market participants and other constituencies (especially AT1 issuers other than UBS who would (or could) also be affected by the changed rules) will publicly voice in the course of the consultation until 29 September 2025 – and what the Swiss Federal Council will then make out of that feedback.
Stefan Kramer (stefan.kramer@homburger.ch)
Benjamin Leisinger (benjamin.leisinger@homburger.ch)