Supervisory decision on CoCos

By Catherine Bosley
BASEL, Switzerland, Feb 24 (Reuters) - Supervisors will give an update mid-year on whether banks can count bonds that turn into equity at times of stress as part of their main capital cushion, a top regulatory official said on Thursday.
Hybrid bonds known as contingent capital, or CoCos, can help banks top up capital quickly in times of financial stress without having to make destabilising fire sales of assets.
Credit Suisse sold $6 billion of CoCos for inclusion in Tier 1 capital.
Stefan Walter, secretary general of the Basel Committee of global banking supervisors, said it was not clear if CoCos can count towards top regulatory capital.
"We haven't yet allowed CoCos into the capital base. That is something that we're analysing, and what we're looking at is the pros and cons of that," Walter said.
He said CoCo usage needed assessing not just from an individual bank's perspective but from its impact on the broader market.
There was a need to think about "how do you feel if this gets distributed throughout the financial system and other financial institutions have to take a haircut at a time when maybe they're also teetering a bit", Walter said.
"We will provide more information around the middle of the year," he said.
Swiss Re's chief financial officer has also raised concerns about insurers buying bank CoCos.
INSANE RETURNS
The Basel Committee authored the tougher Basel III bank capital  rules that will be phased in globally from the start of 2013, but some supervisors are pushing for earlier compliance.
Costs from new regulation is already beginning to bite the bottom lines of banks, particularly their return on equity (ROE), a key benchmark of profitability.
Credit Suisse, for example, is targeting an ROE of around 15 percent, far lower than the 20 to 30 percent banks aspired to before the world financial crisis began in 2007.
"Some of the returns on equity, if you look at the last five years leading up to the crisis versus long, long kind of averages, were insane," Walter said.
"There is some room for ... a combination of more cost efficiency, less bloated balance sheets. Somewhat more reasonable returns on equity. And the combination of those things should provide the capacity for absorbing the costs," Walter said.
The shadow banking sector of less regulated entities, ranging from hedge funds to money market funds and special purpose vehicles holding securitised products also faces a crackdown, as called for last weekend by finance ministers from the world's 20 leading economies.
"As we raise the bar in the banking sector, there's the risk activity spills into the non-bank sector," Walter said.
"Whenever a bank-like activity is performed outside a bank, by which I mean liquidity transformation, provision of credit and leverage, when you have those things coming together, those activities should be subject to comparable standards as banks and then brought out of the shadows," Walter said.