By Nicholas Larsen, International Banker
Swiss regulators have moved in recent months to impose new regulations on UBS as part of a broad attempt to prevent another collapse in the mould of Credit Suisse’s failure. UBS, the country’s largest lender, acquired its beleaguered Swiss rival as part of a state-backed rescue in 2023. But it now faces a potentially substantial increase in its mandatory capital requirements as the government seeks to toughen its stance on the country’s biggest lender.
The proposed rule changes could require UBS to hold an additional $26 billion in core capital, or $18 billion in new capital, as the Federal Department of Finance (FDF) wants the lender to fully capitalise its foreign subsidiaries. Whilst it is currently required to match 60 percent of the capital at its global subsidiaries with capital at the parent bank, the FDF wants to raise that threshold to 100 percent, which would require a $26-billion increase in its common equity Tier 1 (CET1) capital, a key measure of capital strength, particularly during times of crisis.
That said, the bank would be permitted to lower its Additional Tier 1 (AT1) bond holdings by $8 billion, thus reducing the new capital obligation to $18 billion. The FDF also confirmed that the proposed reforms, should they be passed into law, would come into force at the start of 2028 “at the earliest”, with UBS being given an additional transition period of “at least six to eight years” to implement the changes.
“The Credit Suisse crisis made it clear that the Swiss parent bank’s capital base was insufficient. The implementation of the package of measures is intended to substantially reduce the likelihood that another systemically important bank in Switzerland will get into a severe crisis, and that emergency measures by the state will be required,” the FDF stated. “Growth abroad is still possible. But, in [the] future, increases in the value of foreign subsidiaries or the purchase of further foreign subsidiaries will have to be fully covered by capital and can no longer partly be financed with debt at the cost of the parent bank.”
The Swiss National Bank (SNB) confirmed its support for the FDF’s proposals, which will “significantly strengthen” UBS’s resilience. “As well as reducing the likelihood of a large systemically important bank such as UBS getting into financial distress, this measure also increases a bank’s room for manoeuvre to stabilise itself in a crisis through its own efforts,” the SNB stated. “This makes it less likely that UBS has to be bailed out by the government in the event of a crisis.”
Moreover, Karin Keller-Sutter, head of the Federal Department of Finance, said she expected such requirements to improve the bank’s stability in such areas as asset management. “I don’t believe that the competitiveness will be impaired, but it is true that growth abroad will become more expensive,” the Swiss finance minister told reporters in June.
Indeed, with UBS easily the Swiss bank with the farthest-reaching international footprint, it holds a distinct competitive advantage within the local market—one that it insists on maintaining. Should the proposed regulatory reforms pass, that advantage will be decidedly eroded, impacting the bank’s ability to deliver market-leading services across many of its business areas.
The bank has called the regulatory proposals “extreme”, arguing that regulators are unfairly punishing UBS for intervening at the behest of the government to rescue Credit Suisse. According to UBS’s calculations, based on its first-quarter results and a CET1 capital ratio target of 12.5-13 percent, the proposals would raise its capital requirements by $24 billion, requiring it to hold $42 billion in total additional CET1 capital. It stated it “strongly disagrees with the extreme increase in capital requirements that has been proposed” and that such changes “would result in capital requirements that are neither proportionate nor internationally aligned”.
The bank also warned that its business model and position as a Swiss global bank were at risk from the increased capital requirements. “Our ultimate goal is to have a reasonable solution out of this political process so that we can continue to compete as a global bank out of Switzerland with our current business model,” UBS Chief Executive Sergio Ermotti said during a call with analysts in late September, as reported by the Wall Street Journal. “These proposals would unduly penalize UBS, which has operated without regulatory concessions and was in a position to credibly step in and rescue Credit Suisse, contributing to the stability of the Swiss and global financial system in March 2023.”
UBS shareholder Cevian Capital recently told the Financial Times (FT) that, should the capital reforms be approved, it would be “not viable” for the bank to operate from Switzerland. As such, it would have “no other realistic option” but to leave the country, unless the reforms were watered down.
According to Johann Scholtz, senior equity analyst at Morningstar, such news would be “as bad as it will get for UBS” and that the bank “can now lobby for some concessions and take some actions themselves to mitigate impact, for instance, upstream some excess capital from its subsidiaries”. Scholtz also told CNBC that while negotiations would start immediately, a long phase-out period would likely be implemented to allow UBS time to deploy the measures, with 2034 the earliest year that they would fully apply.
Lobbying has already begun in earnest, with Swiss business groups and lawmakers having reportedly made progress toward a sizeable reduction in the capital requirements. According to the Financial Times, which in early October spoke to people familiar with the discussions involving representatives from the Liberals (FDP), the right-wing People’s Party (SVP) and the Swiss Bankers Association (SBA), a counterproposal could see that $26-billion capital burden slashed to less than $15 billion.
“There is an increasing feeling among some in the business world and some politicians that with all of the shocks Switzerland is experiencing, the environment has changed,” one of the people with knowledge of the compromise discussions told the FT. “Now is not the time to be hurting the interests of the biggest bank, or making it more susceptible to a foreign takeover.” Another unnamed source confirmed that frustration was growing in political and business circles over the stalemate between Keller-Sutter and Ermotti.
“Expect months of wrangling ahead of a final set of reform proposals in May,” noted the FT’s deputy editor, Patrick Jenkins. “Ultimately, despite the trauma Switzerland experienced through the collapse of Credit Suisse, compromise and consensus are in the country’s DNA. That, if nothing else, may give UBS and its investors cause for hope that the country will not diverge too far from the rest of the world.”
UBS continues to affirm its 15-percent target for return on CET1 capital, as well as its capital-return intentions for the year. “UBS will actively engage in the consultation process with all relevant stakeholders and contribute to evaluating alternatives and effective solutions that lead to regulatory change proposals with a reasonable cost/benefit outcome,” the bank said following the announcement of the proposed reforms. “UBS will also evaluate appropriate measures, if and where possible, to address the negative effects that extreme regulations would have on its shareholders.”
Elsewhere, FINMA (Swiss Financial Market Supervisory Authority) recently confirmed that while UBS’s recovery and emergency plans in the event of a crisis have improved, they remain inadequate overall. Switzerland’s financial regulator noted in late September that although progress had been made in improving the bank’s resolution strategy since taking over Credit Suisse, further updates to its emergency plan were needed.
“UBS’s emergency plan largely fulfils the current statutory requirements,” FINMA confirmed, almost one year after mandating that the bank strengthen its emergency and recovery plans to account for additional risks following the takeover. “However, it needs to be better integrated in the resolution plan in the future and thus cannot currently be regarded as executable.”
“As confirmed by Finma, UBS fulfils the current requirements to be resolved according to the preferred resolution strategy in the event of a crisis,” the bank responded in a separate statement. “As an additional safety measure, the Swiss emergency plan would be available in an extreme crisis scenario…the newly mandated further development of the emergency plan aligns with the expansion of options for action in the event of resolution.”