Hedge fund Caius Capital reports Unicredit for allegedly breaking European banking rules by misclassifying capital

A hedge fund has reported Italian bank Unicredit to the European Banking Authority, alleging that it has misclassified a massive near-€3bn (£2.6bn) chunk of its capital.

International and EU standards require that all banks must hold some “common equity tier one” (CET1) capital, such as common shares and retained earnings, to protect them and help them absorb losses in the event of a financial crisis.

But Caius claims that Unicredit is misclassifying a €2.98bn complex instrument, a convertible bond, as CET1 capital – and in fact has no CET1 instruments and is “grossly undercapitalised”.

Read more: Deutsche Bank minimum capital requirements increased by European Central Bank

If the regulator were to uphold the complaint, and force Unicredit to convert the securities into ordinary shares, the bondholders could lose around €2bn.

Rather than claiming Unicredit has misclassified the bonds deliberately, Caius believes that the bank may have made a mistake.

Due to the volume of work which regulators were lumbered when the new rules were brought into force, reviewing and reclassifying all existing instruments, the hedge fund believes that the main burden of judging compliance fell on the banks themselves.

They may have made mistakes due to the technical nature of the regulations, and instruments may have slipped through the net.

Read more: Bank of England stress tests: This is how the lenders reacted

Unicredit this morning issued a statement, saying it had received the letter and that the regulatory treatment of the instruments “has been fully disclosed to the market and confirmed and reviewed by the competent regulators”.

However, it said it would keep investors updated with further details.

Unicredit would not be the only bank to have made such a mistake. Italian peer Monte dei Paschi di Siena is currently in the process of converting similar instruments to ordinary shares.

Meanwhile Caius, which was launched in October 2016 by former Och Ziff partner Antonio Batista and Goldman Sachs’ William Douglas, last year exposed a certain class of West Bromwich Building Society’s shares as not qualifying as CET1 capital.

Caius focuses on distressed credit opportunities, with a particular scrutiny on the regulatory capital of European financial institutions.

Read more: Shares in Clydesdale Bank owner CYBG slump after bank takes new PPI hit