Bail-in-Bonds

Following the financial crisis of 2007/08, the bail-in has established itself as the preferred resolution strategy for large banks throughout Switzerland and internationally. According to the concept, it is not the bank’s owners or the state that are to finance a resolution but the bank’s creditors. This is to be achieved by converting a certain type of debt called «bail-in-bonds» into equity capital. The (formerly two) major Swiss banks have issued bail-in-bonds in the amount of approximately CHF 50 billion each. These instruments are «structurally subordinated» and, since the recent introduction of the bail-in sequence in the Banking Act, also subordinated by law. Nevertheless, in the respective prospectuses the major banks explicitly refer to their bail-in-bonds as «unsubordinated». This article explores how the banks justify this designa­tion and how it is that, even after the revision of the Banking Act, FINMA continues to approve it. In a second part the bail-in strategy is…