After the bailout of Credit Suisse by UBS and Swiss regulators, faith in the banking system was seemingly restored, as equities markets rallied the following day, after an initial sell-off.

However, as equities rebounded, there was another fallout surrounding the US$275bn bond market, with $US17bn worth of Credit Suisse hybrid securities written down, wiping out many investors who held bonds in the risky Credit Suisse debt.

For the uninitiated, hybrids combine the characteristics of stocks and bonds. They typically promise a fixed or floating rate of return at a later date (like bonds) with more risk features built-in, often resulting in a higher rate of return akin to stocks.

Specifically known as Additional-Tier 1 (AT1) bonds, these hybrid securities were created after the global financial crisis in 2008 to prevent future bail-outs. As such, the purpose of AT1 bonds was to act like high-yield bonds in good times and conversely convert to equity to absorb losses when trigger points were reached.

Many investors were left worried at the possibility that this could cause a ripple effect on AT1 investor holdings at other banks.

Many analysts and key industry figures suggest this is not the case in Australia.

According to Assistant Treasurer, Stephen Jones, Australian law wouldn’t allow AT1 securities to be wiped out in the same way as Credit Suisse’s.

“Our banks are unquestionably strong, very different legal framework. We don’t need to go into the ‘what if’ rabbit hole. It’s an entirely different set of circumstances here in Australia,” the Treasurer stated.

Further from this, in Australia, banks and APRA are explicitly required to follow creditor order of priority and common equity instruments rank above bonds, making AT1 bondholders safer investments from a regulatory standpoint.

Bond Advisor associate director, Charlie Callan, agrees, despite conceding “higher interest rates, falling house prices and weaker conditions” may put pressure on the local banking system.

“There is not a scenario locally where we could see local hybrid holders treated in the way Credit Suisse hybrid holders have been treated in terms of its subordination to common equity”.

Additionally, senior investment strategist at BetaShares, Cameron Gleeson, went further to allay fears in the event of an Australian bank bailout scenario.

“If an equivalent capital trigger event was to occur in Australia, the order of preference is to convert hybrids into ordinary shares, with a write-off only considered as a last resort.”

This is contrary to the recent UBS-Credit Suisse deal, whereby AT1 bondholders received nothing, while shareholders will receive US$3.23 billion, despite ranking below bondholders in terms of who usually gets paid when a bank collapses.

Worth A$43 billion, consisting of convertible preference shares, capital notes, hybrid securities and convertible bonds, hybrid capital represents a huge market in Australia and one that is being heavily scrutinised as the spotlight is on the banking sector, globally.

Past performance is not a reliable indicator of future performance.