In a landmark ruling, the Federal Administrative Court of Switzerland declared on Tuesday that the write-off of 16.5 billion Swiss francs ($20.53 billion USD) in Credit Suisse bonds during the bank's collapse in March 2023 was unlawful. This decision challenges the Swiss government's strategies for managing banking crises and raises questions about the legal frameworks used in financial emergency interventions.

Credit Suisse, once a cornerstone of global finance, faced a catastrophic downfall, prompting swift action from Switzerland's financial supervisory authority, FinMA. To facilitate a takeover by UBS and stabilize the financial market, FinMA authorized the elimination of these Additional Tier 1 (AT1) bonds, which are typically designed to absorb losses in dire financial situations. However, this move prioritized shareholders over bondholders, contradicting the usual financial pecking order in insolvency proceedings.

The court criticized the government's emergency ordinance, particularly Article 5a, which empowered FinMA to write down the AT1 bonds without a trigger event that would typically justify such severe measures. The judges found that Credit Suisse was sufficiently capitalized at the time, meeting all necessary regulatory capital requirements, thus rendering the bond dissolution both unnecessary and illegal.

Over 3,000 bondholders had appealed against FinMA's drastic decision, leading to this significant court judgment. The ruling has partially revoked the 2023 write-off order, stating that the conditions for such financial actions were not met and highlighting the absence of constitutional backing for Article 5a.

In response to the court's decision, and just two weeks prior, the Swiss Federal Council enacted a new law, clarifying FinMA’s powers and the rights of AT1 bondholders during financial crises. This law aims to prioritize bondholders over shareholders, correcting the controversial aspects of the previous emergency measures.

Despite the court ruling, FinMA has announced plans to appeal to the Federal Supreme Court, Switzerland’s highest judicial authority. They argue that the emergency measures were crucial for the bank merger and the overall stability of the financial system, indicating a continued debate over the balance between legal mandates and financial emergency actions.

This case not only highlights the complexities involved in managing banking collapses but also sets a significant precedent for the treatment of bondholders in future financial crises. The outcome of FinMA's appeal and the implementation of the new laws will be closely watched by financial markets around the world, as they could influence future regulatory responses to similar situations.