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Swiss finish rests on big assumption about CoCos

When the Basle Committee on banking supervision proposed new minimum capital requirements in September of 7% total common equity against bank assets and 10.5% total capital, they left open the possibility of imposing higher surcharges on systemically significant or so-called too-big-to-fail banks.

It remains to be seen whether or not these will be commonly agreed international standards or instead be shaped by individual country regulators.

On October 4, the Swiss Federal Council published the recommendations of its commission of experts on what these surcharges should be for the country’s two biggest banks. Switzerland intends to require 19% of total capital against risk-weighted assets; 10% must comprise common equity; the other 9% must be in the form of contingent capital notes that would convert into common equity if either bank’s common equity ratio falls to 5%.

These are eye-watering amounts of capital, although both UBS and Credit Suisse had been bracing themselves for even worse from the so-called ‘Swiss finish’ that their national regulators were always going to impose. Credit Suisse analysts say: “We had been expecting a 12% minimum equity tier 1.” So the 10% requirement may come as some relief.

But there’s another wild card at play here. The Swiss regulators seem to expect that UBS will be able to raise Sfr27 billion ($28 billion) of contingent capital notes against its Sfr300 billion of risk-weighted assets in the next five years, while Credit Suisse will sell SFr36 billion of CoCos against its SFr400 billion of risk-weighted assets.