Credit Suisse faces a tough decision: either double down on its expensive debt operation or retreat from a business it has long viewed as a cornerstone in the U.S.

Switzerland’s finance ministry just made the choice a little more obvious after it asked the country’s biggest banks to essentially raise more capital or curtail their activities, according to Bloomberg’s Jeffrey Vogeli. In light of the latest salvo from regulators, it’s hard to see how Credit Suisse can avoid shrinking its debt-trading and sales group.

The U.S. corporate-debt group is already contracting ahead of an Oct. 21 announcement that is expected to shed more light on Credit Suisse’s plans to reorganize its business. Last month, the firm said that Jim Finch, co-head of U.S. loan capital markets, was retiring and that Michael Burke, co-head of U.S. high-grade debt sales, had left the bank, according to memos obtained by Bloomberg News. Tim Brennan, who led high-yield credit trading in the Americas, left in March.

Meanwhile, the Zurich-based bank has steadily lost ground in the race to underwrite corporate bonds, the one bright spot in a generally deteriorating landscape for the biggest debt-trading shops. While Credit Suisse was the No. 1 manager of U.S. high-yield bond sales from 2001 to 2003, it has fallen to eighth place so far this year, according to data compiled by Bloomberg. In European bond underwriting, it has declined to the sixth most active from fifth last year.

The U.S. capital markets are the world’s deepest and typically most profitable, and global banks have spent years and millions of dollars jostling for a bigger slice of the action. Last year, for example, underwriters earned $5 billion to underwrite $363.2 billion of dollar-denominated junk bonds. And winning these assignments often has added benefits. For example, it leads to elevated trading activity for the sales desks right after each issuance.

But this debt is becoming more expensive for banks to hold under capital requirements, which demand that firms raise more equity to offset bigger pools of risky holdings.

This is especially true for Credit Suisse, which is planning to raise more than 6 billion Swiss francs in a stock sale in the near future as part of a new business plan. Even that may not be enough to comply with the Swiss finance ministry’s latest rules, which require that the nation’s lenders hold capital equal to about 5 percent of total assets, above the 3 percent minimum set in a global agreement by the Basel Committee on Banking Supervision.

UBS, Switzerland’s biggest bank, has already drastically scaled back its securities unit, leaving it just a skeleton of what it used to be in the U.S. Credit Suisse may have to make some similar moves, even if not as severe. Its reluctance is obvious: It bought Donaldson Lufkin Jenrette in 2000 in large part to dominate junk-bond trading in the U.S.

But times have changed. Credit Suisse is going to have a harder time competing against U.S. banks in this area, making a five-star debt unit a luxury it can no longer afford.

(This column does not necessarily reflect the opinion of         
Bloomberg LP and its owners.)              

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