After a frenzied weekend of talks to find a solution ahead of the Asian market opening, UBS decided to buy its smaller rival for about $3.3 billion in a stock deal with guarantees and extended liquidity from the Swiss Central Bank and the government. As part of the takeover, the Swiss central bank provides liquidity aid of 100 billion Swiss francs to UBS (or about 12% of the Swiss’s GDP). The government guarantees 9 billion Swiss francs for potential losses on the assets it is taking over.

UBS will see the invested assets in the bank’s wealth and asset management climb to around $5 trillion and get a special waiver to keep Credit Suisse’s profitable Swiss unit, which according to many analysts, was worth more than three times what UBS paid for the whole company.

The acquisition of Credit Suisse comes after the bankruptcy of several regional U.S. banks this month heightened fears in the financial system. The Zurich-based lender’s bonds and shares plunged, and counterparties began buying protection against a possible default. A collapse of the bank would have caused massive collateral damage to the Swiss financial industry and a risk of contagion for UBS and other banks.

Bondholders are usually better protected against losses than shareholders, but not in this case. The Swiss regulator will impose losses on $17 billion of high-risk debt known as Additional Tier 1 bonds which are part of a debt and equity buffer meant to prevent taxpayers from having to foot the bill for a bank’s collapse.

The total writedown marks the most significant loss for the 275 billion euro AT1 market. Wiping out the AT1 holders while paying out substantial sums to shareholders goes against all the international resolution principles and rules agreed upon after 2008. European regulators designed the ATIs in the aftermath of the global financial crisis to impose losses on creditors when banks begin to go bust without resorting to taxpayer money. But not to avert the loss of shareholders.

This decision will likely cause disruptive re-pricing across the industry. The market for new AT1 bonds is likely to freeze, and the cost of risky bank funding is expected to rise, given that the regulatory decision has surprised some creditors. From the Swiss authorities’ point of view, it was able to force a writedown because it needed to increase Credit Suisse’s capital and resolve its liquidity issues. Bonds typically take a writedown whenever government support is offered to a lender facing solvency problems.

The legality of the Swiss regulator’s decision is likely to be questioned. Besides, ff new problems should arise in the European banking system, it won’t be easy to appeal to foreign private investors.