Bloomberg News

Swiss Re, Zurich Financial Should Cut Risks to Banks, OECD Says

January 24, 2012

Jan. 24 (Bloomberg) -- Switzerland should introduce laws to limit the risks of insurers Swiss Re Ltd. and Zurich Financial Services AG to the country’s biggest banks, the Organization for Economic Cooperation and Development said

The Swiss National Bank and the financial market regulator should make sure the country is prepared for a simultaneous trigger of contingent convertible bonds, or Cocos, issued by UBS AG and Credit Suisse Group AG, the Paris-based organization said in an economic survey of Switzerland published today. Such an event could become “dangerous” should the buyers of these bonds be concentrated within a few Swiss financial institutions, according to the report.

Cocos, which automatically become equity when capital falls below preset levels, can be used to help banks meet stricter rules and can contribute close to half of the new capital requirements. The holders of these bonds should be able to absorb any losses after they are converted, and these instruments should therefore be widely held, the OECD said.

“The two largest Swiss insurance groups’ balance sheets” together total “more than 100 percent of GDP,” according to the report. “Significant exposures to” UBS and Credit Suisse “could exacerbate any financial risks” in the banks because insurers have some systemic weight, the OECD said.

Switzerland should also introduce orderly resolution plans for the largest insurers to avoid using taxpayers’ money in the case of a threat of insolvency, the report said.

--Editors: Stephen Taylor, Steve Bailey

To contact the reporter on this story: Carolyn Bandel in Zurich at cbandel@bloomberg.net

To contact the editor responsible for this story: Frank Connelly at fconnelly@bloomberg.net


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