ZURICH, April 23 (Reuters) – Additional Tier 1 (AT1) bonds are set to take centre stage when the Swiss parliament starts finalising rules for banking giant UBS in May, determining new capital requirements after the lender acquired fallen \u200crival Credit Suisse in 2023.<\/p>\n
Some lawmakers hope to rely on AT1 capital to support UBS’s competitiveness, though the government \u200cargues the loss-absorbing capacity of AT1 debt is too limited.<\/p>\n
WHAT IS AT1 CAPITAL?<\/p>\n
AT1 is a form of regulatory capital ranked just below the highest-quality Common Equity \u200bTier 1 capital, according to a definition by the Basel Committee on Banking Supervision.<\/p>\n
While CET1 capital absorbs losses immediately when they occur, AT1 bonds can be written down or converted into equity in a financial crisis.<\/p>\n
Banks issue AT1 bonds as high-yielding perpetual debt aimed at institutional investors. UBS has about $20 billion in AT1 capital on its books, according to its latest annual report.<\/p>\n
WHY DOES IT MATTER FOR UBS \u200cREGULATION?<\/p>\n
Switzerland is tightening its banking rules after the \u2060collapse of Credit Suisse left UBS as the country’s sole big bank.<\/p>\n
The government’s chief demand, deemed excessive by UBS, is that the bank must fully back its foreign units with CET1 capital, which the \u2060lender estimates would require it to add about $20 billion in this expensive form of capital.<\/p>\n
Concerned about the bank’s competitiveness, Swiss lawmakers from different parties pitched a concession that would allow UBS to instead use AT1 capital to cover up to 50% of the capitalisation requirement for its \u200bforeign \u200bunits.<\/p>\n
The proposal could allow UBS to keep operating at around current CET1 \u200bcapital levels while adding about $15 billion in less \u200cexpensive AT1 debt, an idea the bank has called “more constructive”.<\/p>\n
The proportion of AT1 debt allowed to meet the requirements will be “a potential game changer” for UBS, said David Benamou, chief investment officer of Axiom Alternative Investments.<\/p>\n
HOW SAFE IS AT1 CAPITAL IN A CRISIS?<\/p>\n
Government officials and academics are sceptical, however. AT1 instruments can supplement CET1 capital, but are not an equivalent substitute, said Hans Gersbach, an economics professor at ETH Zurich.<\/p>\n
The main reason is that AT1 capital must be converted or written down to absorb losses, and to \u200cdo so carries risks.<\/p>\n
If the financial regulator intervenes while capitalisation is still \u200bhigh, it will be perceived as an official signal of distress and destabilise \u200bthe bank. If that trigger point is too low, it \u200bmay be too late to save the bank, critics say.<\/p>\n
“Any conversion of AT1 into equity in \u200ca crisis is likely to be the final blow \u200bto the bank,” said Aymo Brunetti, \u200ban economics professor at the University of Bern who has drafted previous Swiss banking regulation.<\/p>\n
“If you want to make AT1 sufficiently secure, it ends up costing just as much as CET1.”<\/p>\n
UBS CEO Sergio Ermotti, however, said in a post \u200bon LinkedIn last month that AT1 instruments played \u200ca crucial role in stabilising Credit Suisse and enabling UBS to step in.<\/p>\n
“The lesson from recent crises is \u200bnot to remove these instruments, but to ensure they are robust and aligned with international best practice,” Ermotti \u200bwrote.<\/p>\n
(Reporting by Ariane Luthi and Oliver Hirt; Editing by Susan Fenton)<\/p>\n","protected":false},"excerpt":{"rendered":"ZURICH, April 23 (Reuters) – Additional Tier 1 (AT1) bonds are set to take centre stage when the…\n","protected":false},"author":2,"featured_media":56087,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":"","_share_on_mastodon":"0"},"categories":[129],"tags":[31368,30786,6436,1548,19659,223],"class_list":["post-56086","post","type-post","status-publish","format-standard","has-post-thumbnail","category-ubs","tag-at1","tag-at1-bonds","tag-capital-requirements","tag-credit-suisse","tag-tier-1-capital","tag-ubs"],"share_on_mastodon":{"url":"https:\/\/pubeurope.com\/@ch\/116473178491336371","error":""},"_links":{"self":[{"href":"https:\/\/www.europesays.com\/ch\/wp-json\/wp\/v2\/posts\/56086","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.europesays.com\/ch\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.europesays.com\/ch\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/ch\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/ch\/wp-json\/wp\/v2\/comments?post=56086"}],"version-history":[{"count":0,"href":"https:\/\/www.europesays.com\/ch\/wp-json\/wp\/v2\/posts\/56086\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/ch\/wp-json\/wp\/v2\/media\/56087"}],"wp:attachment":[{"href":"https:\/\/www.europesays.com\/ch\/wp-json\/wp\/v2\/media?parent=56086"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.europesays.com\/ch\/wp-json\/wp\/v2\/categories?post=56086"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.europesays.com\/ch\/wp-json\/wp\/v2\/tags?post=56086"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}