UBS agreed to buy Credit Suisse in a historic, government-brokered, all-share deal.

Holders of 'Additional-Tier 1 (AT-1)' bonds have been wiped out. Credit Suisse's roughly 16 billion Swiss francs ($17.3 billion) worth of risky notes are now worthless. The deal will trigger a complete writedown of these bonds to increase the new bank's core capital ' meaning that these creditors have had a worse deal than shareholders, who at least now have some stock in UBS.

'Additional Tier 1' capital was a category introduced under the Basel III banking accords that followed the GFC, with the intention of providing banks with more security. Holders of the bonds were to be behind other creditors in the event of problems. In the first big test of just how far behind they are, we now know that AT1 bondholders come behind even shareholders.

This follows the logic of the post-crisis approach, and it limits moral hazard. The question is whether anyone will want to hold AT1 bonds after this. The market response will be fascinating, and it remains possible that the regulators have avoided repeating one mistake only to make a new one.

bloomberg.com - Ubs credit suisse and the super sizing era of banking monopolies