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UBS raises $2 billion capital with novel bond

Swiss bank UBS has raised $2 billion (SFr1.8 billion) in loss absorbing capital to help meet stringent new regulatory demands on too big to fail institutions.

The innovative notes would shift the burden of losses onto the holder by falling in value if the bank’s capital buffer drops below a threshold value. The notes, bearing a 7.25 per cent interest rate, have been placed with European and Asian investors.

Both UBS and Credit Suisse have been forced to come up with new ways of building up their capital buffers against potential losses following the financial crisis.

Swiss regulators have demanded that both banks insure as much as 19 per cent of their risky assets with readily available capital. This upper threshold is more than twice as high as international standards.

The tough domestic standards – often referred to as the “Swiss finish” – allow banks to raise money from the markets using so-called contingent convertible bonds.

Credit Suisse issued more than $8 billion in bonds last year that would convert into shares should the bank fall into difficulties. The increase in shares would automatically boost the bank’s capital base.

UBS has chosen a different route, forcing its bondholders to take a writedown on their investment should its capital buffer shrink too much in times of stress. The bank said at its annual results conference earlier this month it would consider churning out more notes in future once it had assessed the results of its first issue.

The international markets are watching with interest as the Swiss banks lead the way with the issue of convertible bonds. If successful, they could become a foundation stone in global efforts to make large global banks safer.

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SWI - a branch of Swiss Broadcasting Corporation SRG SSR

SWI - a branch of Swiss Broadcasting Corporation SRG SSR