Ethos Foundation has called for the abolition or replacement of additional tier 1 (AT1) bonds, warning that the instruments pose risks to Swiss pension funds as well as shareholders of Swiss bank UBS.

In a position paper responding to a Federal Council consultation on amendments to the Banking Act and the Capital Adequacy Ordinance, Ethos expressed reservations about AT1 bonds, which are designed to absorb losses in the event of financial distress through write-downs or conversion into equity.

The foundation said the proposed reform of equity capital requirements for systemically important banks, namely UBS, did not go far enough. It instead advocated a strengthening of common equity tier 1 (CET1) capital – also designed to absorb losses – and a full review of the use of AT1 instruments.

The new ‘Too Big to Fail’ framework requires UBS to fully back its foreign subsidiaries with CET1 capital. The Federal Department of Finance has estimated that this would increase CET1 requirements by around $26bn while reducing AT1 bond holdings by approximately $8bn.

Ethos warned that AT1 instruments can exacerbate a banking crisis and represent a particular risk for pension funds that invest in UBS.

“Suspension of the coupon, amortisation or conversion of these instruments into shares – triggered at certain conditions or at the request of the authorities – could cause a crisis of confidence. This could lead to massive deposit withdrawals and securities sales on the financial markets, further aggravating the liquidity crisis,” it said.

The foundation also highlighted the 2023 takeover of Credit Suisse by UBS, when CHF16bn (€17.1bn) of Credit Suisse AT1 bonds were written down without compensation while shareholders received UBS shares worth around CHF3bn. Swiss pension funds were among those affected by the AT1 losses.

Ethos said it supported strengthening CET1 capital both as a regulatory measure and as a shareholder of systemically important banks.

“UBS’s stability is crucial. It forms the backbone of the bank’s client trust – especially in UBS’s core business, wealth management – and is therefore essential for its success,” it added.

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Luigi is IPE's Berlin-based DACH correspondent. His coverage includes regulation and the latest pensions and investments trends, and, being a native Italian, he also covers Italy’s pensions market. He has reported from Italy and Germany on international politics and business for European and US publications including USA Today, Bloomberg BNA and for the investigative magazine L’Espresso. He was previously Germany correspondent for Mergermarket covering M&A.View full Profile

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