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Compensation Schemes of Swiss Banks positive for their Credit Quality

February 8, 2013

UBS announced that they are handing out bonuses in the form of high-trigger Contingent Convertible (CoCo) bonds that get written down to zero if UBS’s regulatory capital falls below 7 percent.  This is a big positive for the credit.  If traders take foolish risks which blow up the company, they will be the first to get hit.  In fact, now the incentive for traders is not to think like shareholders (in a leveraged institution such as a bank, that itself induces high risk taking) but to think like creditors (since the CoCo bonds have limited upside but unlimited downside).  Credit Suisse also has come up with a similar instrument though with a slightly different payoff structure.

This means that the Swiss banks are on the road to redemption, at least in the eyes of the creditors.  This structure will also keep away personnel with more criminal proclivities from seeking employment at these banks.

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From → Credit Analysis

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