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UBS (UBSG.CH) shares rose sharply after Swiss lawmakers proposed easing planned stringent capital requirements. A key element of the proposal is allowing the bank to use AT1 (Additional Tier 1) bonds instead of issuing new equity (shares) to meet the new safety standards. The government’s earlier plan, pushed by Finance Minister Karin Keller-Sutter, would have required UBS to raise up to $26 billion in additional capital, which would have been a huge burden on shareholders. The new proposal is a political compromise:
- UBS may use AT1 bonds to cover its requirements.
- The bank may continue to include certain programme assets and tax relief in its capital.
- In return for these concessions, the expansion of UBS’s investment banking division is to be curtailed.
What are AT1 bonds?
AT1 (Additional Tier 1) bonds, also known as hybrid bonds or CoCos (Contingent Convertibles), are a specific type of debt issued by banks to strengthen their capital base. These are risky instruments that offer higher interest rates than standard bonds. In a crisis situation (e.g. when a bank’s capital falls below a certain level), these bonds may be written off (their value falls to zero) or converted into shares. They act as a “safety buffer” – absorbing losses and protecting depositors and taxpayers from having to bail out the bank. The approval to use AT1 is beneficial for UBS, as issuing debt is usually cheaper and less dilutive for existing shareholders than a forced issue of new shares.
The market reacted euphorically to these reports, interpreting them as the removal of a huge regulatory risk (capital “overhang”). UBS’s share price jumped 5%, reaching its highest intraday level since 2008.
Investors interpret this move as a signal that Switzerland does not intend to “strangle” its largest bank with excessive regulations, and that the threat of a massive capital increase of USD 26 billion has been largely averted. Source: xStation
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