How can banks better protect themselves against crises?
Text: Barbara Spycher
Major banks must not be allowed to fail. Yet taxpayers shouldn’t end up footing the bill for bailouts. This is why we need new ideas for regulating banks.
The takeover of Credit Suisse (CS) by UBS in 2023 prompted the question of how to regulate system-relevant big banks that simply cannot be allowed to fail. What rules need to be put in place — particularly for UBS, a giant in the banking industry — to protect the general public from the costs and risks of a bailout? Experts and politicians are fine-tuning their proposals. The Swiss Federal Council has set out a 30-point package of measures, some of which are expected to make it into parliament in June. The banks, however, are fighting back: A key point of contention is the size of the financial buffer that major banks are required to have. Discussions among specialists revolve around equity and special bonds known in the industry as Additional Tier 1 bonds (AT1 bonds). One of these specialists is Corinne Zellweger-Gutknecht, Professor of Private Law and Business Law at the University of Basel. She has brought a new idea to the table. Let’s start at the beginning.
As part of its review of the CS crisis, a parliamentary investigation committee commissioned several expert reports, one of which was authored by Zellweger-Gutknecht. “While working on the report, I realized just how little equity the parent company in Switzerland actually had, arguably the most important unit within Credit Suisse,” she says. Yet equity is hard currency in a crisis, as it absorbs losses right away.
To Zellweger-Gutknecht, it seems logical that the Swiss Federal Council is now demanding a more substantial equity buffer at UBS, particularly for its parent company in Switzerland. More equity reduces the risk of the government having to bail out another major bank, thereby reducing potential costs to the economy and to taxpayers. “It’s vital for us all that UBS structures its equity and distributes it throughout the Group so that history does not repeat itself,” emphasizes Zellweger-Gutknecht. Bailing out major banks has cost governments elsewhere billions, as seen in the cases of Fortis (now ABN Amro), Commerzbank and Royal Bank of Scotland (now NatWest).
UBS is putting up a fight, however, because increasing equity comes at the expense of shareholder dividends as well as bonuses for top management. So members of parliament have put forward an alternative: Banks should be able to allocate part of the new capital requirement with AT1 bonds.
What are AT1 bonds?
These special bonds offer very high yields for creditors; however, they’re also very risky since in a crisis they’re designed to bear losses too. To this end, the Swiss Financial Market Supervisory Authority (FINMA) may order that the AT1 bonds be written down — in which case the creditors lose everything, as they did with CS in 2023 — or converted into equity, turning the creditors into shareholders. Both options reduce the bank’s debts and increase equity, recapitalizing and stabilizing the bank.
Zellweger-Gutknecht is critical of the plan to use AT1 bonds for some of the newly required equity: “The CS crisis has shown that these bonds don’t fulfil their purpose.” Today’s AT1 bonds, she explains, lack an early trigger. In the most common scenario where a bank is gradually failing, FINMA can’t intervene and absorb losses through AT1 bonds until the bank is no longer able to survive — when it has reached the “point of non-viability” (PONV). Until then, the authorities can only stand by and watch the decline, powerless to act. Such was the case with CS. “By that point, it’s too late,” concludes Zellweger-Gutknecht. She explains that a different type of AT1 bond that converts at an earlier point is therefore required. Her proposal is for “stabilization AT1 bonds,” which gradually and automatically absorb losses. Each time the equity drops by one percentage point, an additional tranche of these AT1 bonds would be written down or converted into shares. Zellweger-Gutknecht is currently researching the viability of this approach and discussing her ideas with other experts. What is clear to her is that these stabilization AT1 bonds would have to be introduced at least throughout Europe, if not beyond.
Today’s mechanism kicks in too late
These new stabilization AT1 bonds would require clear guidelines for when conversion is triggered and, unlike today, this would have to be automatic. This ought to reduce the risk of lawsuits as well. As Zellweger-Gutknecht says, the CS crisis has shown clearly that “absorbing losses with today’s AT1 bonds will always lead to uncertainties and potential lawsuits.” The creditors of the AT1 bonds that were written down during the CS bailout have also filed complaints. The Federal Administrative Court has agreed that the write-down was not lawful. Zellweger-Gutknecht thinks this judgement is incorrect, as she explains in the Swiss Review of Business and Financial Market Law (Issue 2/2026). Several fellow professors of law share her view. The Swiss Federal Tribunal is expected to rule on the case this year.
Partly due to these legal uncertainties, in 2027 Australia will become the first country to no longer recognize AT1 bonds as equity. There, they are regarded as ineffectual and too complex. To compensate, Australia’s banks will have to increase their equity minimally. Various European countries are also considering reforms. We’ll have to see what the coming years bring in terms of equity requirements, both in Switzerland and beyond. Will more countries follow Australia’s example? Will banks be subject to increased equity requirements? Will automatic stabilization AT1 bonds be introduced? For Corinne Zellweger-Gutknecht, one thing is clear: “The status quo is not an option.”
Corinne Zellweger-Gutknecht is Professor of Private Law and Business Law at the University of Basel. Her research focuses on monetary and currency law, central banking law, and topics encompassing both private and financial market law. Her article on the AT1 judgement was published in issue 2/2026 of the Swiss Review of Business and Financial Market Law.
More articles in this issue of UNI NOVA (May 2026).