New capital instruments on Swiss radar

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Switzerland’s big banks are gearing up to issue innovative capital instruments, following the examples set in recent months by Lloyds Banking Group in the UK and Dutch mutual Rabobank.

After encouragement from the Swiss regulator, both UBS and Credit Suisse are examining the feasibility of issuing contingent convertible capital, which acts as debt in good times, but converts into equity when crisis strikes.

The news will come as a surprise to the market, which sees the Swiss duo as among the best capitalised banks in the world.

Credit Suisse boasts a tier one ratio – the standard measure of capital strength – of 16.3 per cent, higher than any leading rival, while UBS ranks second, with a ratio of 15.4 per cent. A figure of 9 to 11 per cent is more standard.

UBS has included among the resolutions for approval at on Wednesday’s annual shareholders’ meeting a request to authorise “a further complement of UBS contingency planning and capital management”.

Although a bank official said UBS had “no concrete plans” to raise such capital currently, senior executives have indicated the “contingency planning” is set to take the form of a contingent convertible, or CoCo, along the lines of the Rabobank model.

Bank analysts believe UBS could proceed with a deal in the autumn to replace a $1.5bn hybrid bond that is set to mature.

Credit Suisse executives say the bank has no immediate plans to launch a contingent capital instrument either, but admit the structure is on its radar.

Lloyds, which launched the first CoCos late last year, restructured about £10bn ($15.4bn) of its debt, exchanging it for contingent instruments that would convert automatically into equity in the event that its capital ratios fall sharply.

CoCos were designed in collaboration with UK regulators, which are keen on the concept. Rabobank followed suit with a new issue last month.

CoCos were invented amid a drive by international regulators to strengthen banks’ capital structures after the financial crisis.

Under the auspices of the Basel Committee on Banking Supervision, regulators are to toughen the definition of core tier one capital.

Contingent convertibles, although not eligible as core tier one capital in normal times, do count in a stress scenario, under the assumption that they would convert into equity.

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