The Swiss authorities orchestrated a CHF 3 billion takeover of a distressed global systemically important bank (G-SIB) by its rival, backed by up to CHF 109 billion in public liquidity guarantees and federal loss-sharing agreements. Critically, the Swiss financial regulator (FINMA) ordered a complete write-down of CHF 16 billion of Additional Tier 1 (AT1) debt instruments to absorb losses, whilst equity holders received a partial payout. This inversion of the traditional creditor hierarchy sent shockwaves through global debt markets, raising the cost of capital for other financial institutions. While defenders argue this emergency intervention prevented a catastrophic collapse of the Swiss financial system and protected taxpayers from a direct capital injection, critics contend that the massive public backstop has created an even larger "too-big-to-fail" entity, exacerbating systemic moral hazard.
Using the information in Extract C and your economic knowledge, discuss whether using regulatory write-downs of creditor debt (such as AT1 bonds) is a more effective policy response than direct government bailouts when managing a systemic financial crisis.
