How AT1 Bonds Are Made, the Hybrid Instruments at the Center of UBS’s Capital Debate

UBS could gain more room to use AT1 bonds for its foreign subsidiaries, but the proposal to strengthen the bank’s capital remains far from settled. The Economic Affairs and Taxation Committee of Switzerland’s Council of States backed the idea on Monday.

The bank welcomed the committee’s position. Karin Keller-Sutter, however, has expressed skepticism. The disagreement points to an unresolved question over how UBS should meet the planned capital requirements and what role hybrid debt should play.

Experts believe UBS would need to issue AT1 bonds with a structure different from the instruments currently available. These securities combine features of debt and capital, with detailed clauses setting out when they can be canceled. Their risks became especially visible during the collapse of Credit Suisse, when AT1 instruments were written down.

That raises questions about who decides the terms and how much freedom banks have to design so-called CoCos around their own needs. The clauses can determine not only when the instruments are canceled, but also how they may be converted into shares.

The debate therefore concerns more than whether UBS can issue additional securities. It also involves the precise rules governing a form of financing that sits between traditional debt and equity, and the safeguards attached to it.