Global banking regulator sounds out investors on suitability of AT1s

Unlock the Editor’s Digest for free

Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.

The global banking regulator has held high-level meetings with bank executives, investors and credit rating agencies in recent weeks to assess the suitability of a form of debt that was controversially wiped out when Credit Suisse collapsed last year.

Bondholders who invested in additional tier 1 — or AT1 — securities lost $17bn when UBS took over its rival Credit Suisse last March.

The deal, which was orchestrated by the Swiss government, upended the traditional bank capital structure by imposing losses on creditors while allowing shareholders to recover $3.3bn.

The Basel Committee on Banking Supervision held a series of meetings at the European Banking Authority last month, according to people with knowledge of the talks, where the regulator sought participants’ views on how well AT1s performed during last year’s banking crisis, which resulted in several bank failures.

Among the questions the regulator asked was whether the implosion of Credit Suisse had changed investors’ views on the riskiness of AT1s and also whether banks were changing the terms on the AT1 instruments they issued.

The Basel Committee, known as the world’s most powerful financial regulator, includes regulators from 28 large economies and sets global policies, including on how much capital banks must hold.

The latest iteration of its framework on bank capital, known as Basel III or Endgame, has met with fierce lobbying by US banks, which fear significant increases in their capital requirements.

In communications sent to roundtable participants and seen by the Financial Times, the Basel Committee said that in response to the series of bank failures last March, it was carrying out “analytical work based on empirical evidence to assess whether specific features of the Basel Framework performed as intended during the turmoil”.

However, the regulator made clear that it was not currently planning to scrap AT1s.

“The roundtable aims to capture a range of perspectives on AT1 instruments, and is not an indication of planned revisions to the existing Basel Framework,” it said in its communication to attendees.

“There seems to be no motivation whatsoever to revisit Basel’s definition of AT1, but that doesn’t rule out any changes at the Swiss or even EU levels,” said Jackie Ineke, partner at Spring Investments, a Swiss fund manager. “Basel just sets minima.”

The Basel Committee declined to comment.

The future of AT1s have become a political issue across Europe since the Credit Suisse wipeout. A paper prepared by the Dutch finance ministry last month floated the idea of abolishing the instruments, but acknowledged this would need the backing of European authorities.

In Switzerland, a report into the country’s “too big to fail” regime for regulating banks considered whether to scrap AT1s, but ultimately decided against it.

The package of proposals — which is expected to be signed off into law by the Swiss parliament next year — included a recommendation to increase capital requirements on banks with foreign subsidiaries.

Swiss finance minister Karin Keller-Sutter last week told newspaper Tages-Anzeiger that it was “plausible” that the changes could result in UBS — the country’s biggest bank — having to hold between $15bn and $25bn of additional capital.

UBS’s shares have dropped about 8 per cent since the reform package was published earlier this month.