Two of Europe's biggest banks joined the rush to buy back debt on Monday, notching up transactions worth some $5 billion combined as they scramble to bulk up capital ahead of new banking regulations. Credit Suisse and Commerzbank follow similar moves by more than a dozen banks across Europe conducting 'liability management exercises' (LME) designed to ensure they can withstand any future financial crises after many required state aid to keep going in recent years.
The aim in buying back debt at current prices - below those the bank would have to repay otherwise - is to reduce the banks' exposure to any future liability. Commerzbank has struggled to raise cash in an effort to avoid further state aid after being bailed out for 18 billion euros in the financial crisis.
The bank is paying for its transactions in its own shares in order to boost its Tier One capital ratio but this is proving unpopular with some investors who would rather hold the securities to maturity in order to get the full payment. Commerzbank had aimed to pocket new capital worth 1 billion euros via the operation but only managed to secure 776 million euros.
The bank is moving to fill a 5.3 billion euro gap identified by Europe's banking regulator EBA and had said on February 23 that it had narrowed the gap to 1.8 billion by the end of 2011. By comparison, Credit Suisse, whose balance sheet dwarfs the Swiss economy, is using its own capital to buy back securities. It will buy back Tier 1 and Tier 2 instruments worth up to 4 billion Swiss francs ($4.38 billion) ahead of a roadshow for new Contingent Convertible bonds - which convert to equity - early this week.
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