Fitch: Credit Suisse reorganisation will improve resolvability

Reuters

Nov 21 (Reuters) - (The following statement was released by the rating agency)

Planned changes to Credit Suisse Group's (CSG) structure and funding policy will facilitate the group's resolvability under the Swiss regulator's preferred "single point of entry" (SPE) approach, Fitch Ratings says. This will increase the importance of the holding company in group funding activity, as it has not been a debt major issuer so far.

The announcement has no immediate rating effect. But over time an additional buffer for the operating banks' senior creditors will be built up as debt with contractual bail-in language will be issued by the group holding company, which may affect ratings. We will factor in potential structural subordination and the terms of any bail-in debt issued by the holding company when assessing the relative position of creditors of the various group entities.

Most debt issuance in the group is at the main operating level (Credit Suisse AG). Most of this is subject to the possibility of a statutory bail-in under the Swiss regulator's wide-ranging powers in a resolution scenario.

We expect several other large European banking groups to make changes to their structures because of various legal and regulatory requirements to strengthen capitalisation and improve their resolvability. CSG's announcement raises the bar for other large, complex banking groups looking to restructure in the coming years.

Regulators are encouraging banking group structures that enable "bail in" of creditors while maintaining uninterrupted fully functional systemically important operations. This is in line with a clear intention ultimately to reduce implicit state support for financial institutions in Europe and the US. Switzerland has made progress in implementing legislation to address the too-big-to-fail issue for the country's two biggest banks, CSG and UBS. The large US banking groups already operate under holding company structures, with the vast majority of bonds issued by the holding company, making an SPE approach for resolution through the holding company easier.

Credit Suisse AG and CSG's ratings are equalised at 'A', primarily reflecting the holding company's limited role in the group and the current absence of double leverage at the holding company. The ratings of Credit Suisse International and Credit Suisse (USA), Inc. are also equalised as they are core subsidiaries of Credit Suisse AG, and the group's funding and liquidity is managed in a central treasury. The relative position of senior creditors in group entities, including a new Swiss-incorporated bank, will depend on the details of funding and capitalisation of each entity, including fungibility in normal times, and potential structural, statutory and contractual subordination in the event of resolution.

CSG already has large buffers in the form of contingent capital instruments. At end-October 2013 it had CHF7.9bn "high-trigger" buffer capital notes issued by (or guaranteed by) the holding company. These become loss-absorbing if the group falls below a 7% Basel III common equity tier 1 (CET1) ratio. The group also had CHF4.1bn "low-trigger" contingent capital notes, predominantly issued by Credit Suisse AG. These become loss-absorbing if the group triggers a 5% or 5.125% CET1 ratio. Additional legacy hybrid capital instruments remain in the form of "old-style" Tier 1 and Tier 2 instruments, which the Swiss regulator has stated would be bailed in in a resolution. Senior unsecured debt, excluding structured notes, totalled about CHF96bn at the same date.

CSG today announced that debt with bail-in clauses would be issued by the group holding company, rather than by Credit Suisse AG. The group also plans to establish a new Swiss-based separate subsidiary for its domestically booked business, essentially Swiss retail and corporate banking, wealth management, and its product and sales network in Switzerland. It will also reorganise the booking centres for its over-the-counter derivative investment banking business, which is currently predominantly booked in its UK-based subsidiary Credit Suisse International. The US derivatives business is also expected to be transferred from Credit Suisse International to its US broker-dealer.

UBS, Switzerland's largest bank, does not have a holding company structure. In October 2013 it announced plans to establish a new banking subsidiary to house the group's Swiss systemically important business, which is expected to include its retail and corporate business division and probably the Swiss-booked business within its wealth management division. UBS has not made any statement regarding the creation of a holding company.

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