When Swiss lawmakers meet next month to draft new capital requirements for UBS, they are likely to strike a balance between protecting taxpayers from a future banking crash and allaying the bank’s fears it could be rendered uncompetitive.
Parliament is expected to water down the around $20 billion in additional Common Equity Tier 1 capital sought by the government, according to lawmakers, as many fear requiring a permanent buffer of this scale could scare off UBS’ investors.
“We certainly don’t want to put taxpayers’ money at risk for a possible bank bailout, but we also mustn’t weaken UBS unnecessarily,” said Fabio Regazzi, a lawmaker of the Centre party, which will be decisive in crafting a majority.
“I’m confident we’ll find a compromise,” Regazzi said, stressing he will work to ensure that final rules take both Swiss financial stability and UBS’ competitiveness into account.
The measures drafted in response to the 2023 collapse of Credit Suisse and its subsequent takeover by UBS will be adopted in parliament’s December session at the earliest.
But an influential parliamentary committee to which Regazzi belongs that has a reputation for business-friendliness is poised to set the tone for the debate.
FROM $12 BILLION TO ZERO
At meetings set for August 10, 11 and 31, the upper house’s Economic Affairs and Taxation Committee will consider lowering the government’s proposed requirement for UBS to back its foreign units with 100% CET1 core capital to about 70%, 80%, or even 50%.
That could reduce the buffer in extra capital UBS must hold, after a transition, to anything from about $12 billion to zero.
Committee members aim to reach a decision next month, which would get the bill to the upper house in September and might allow for final capital rules to be passed by the end of 2026.
However, the matter remains contentious and majorities behind any concession proposal still unclear, lawmakers say.
Officials have vigorously underlined how anything short of UBS fully backing its foreign units with CET1 capital could pose a risk to financial stability since the bank’s balance sheet is bigger than Switzerland’s economy.
The Swiss National Bank said this month partial backing implies some of the capital must cover risks at both the parent bank and its foreign units, contravening financial prudence. Other regulatory experts have echoed its concerns.
The SNB stance could bolster the case for a higher percentage of required CET1 capital, parliamentary sources said.
SIZE OF BUYBACKS AND BONUSES AT STAKE
UBS argues that the need to hold an extra $20 billion in CET1 capital would put it at a disadvantage when competing against big U.S. banks.
With so much capital tied up, the bank would have less money available to buy back shares, invest in AI or fund expansion in key markets, two people familiar with the bank’s thinking said.
Fees for Swiss clients could go up, hurting the economy, one of the people said. It could also result in lower bonus payments, a third source close to the bank said, affecting its ability to attract and retain talent.
UBS declined to comment beyond pointing to a previous statement in which it criticised the government proposals, describing them as out-of-step internationally, and forecast they could have serious consequences for the Swiss economy.
“It is our duty to evaluate appropriate measures to address, if confirmed, the negative effects of these extreme proposals,” UBS Chair Colm Kelleher told shareholders in April.
AT1 AS A BRIDGE TO FULL CAPITALISATION
Lawmakers from most parties acknowledge the bank’s concerns and are wary of a potential setback for Swiss finance and the economy, which is already stung by uncertainty over U.S. tariffs.
To find potential middle ground, lawmakers are likely to let the bank partly use Additional Tier 1 capital to back its foreign units. Cheaper to hold than CET1, AT1 debt is designed to absorb losses during crises, but is also less secure.
The parliamentary committee in August is also set to consider introducing a new, higher regulatory trigger point.
That would require UBS to refrain from paying out investors if it dips below a minimum capital ratio, a measure aimed at improving the loss-absorbing capacity of AT1 bonds.
Financial stability experts say it is not clear whether such strengthened AT1 capital can also help to stabilise a struggling bank, or only absorb losses as it is being wound down.
Nevertheless, AT1 could be the compromise Swiss lawmakers choose to reach 100% capitalisation of UBS’ foreign units without imposing a CET1 capital burden they fear will hurt the bank.
(Reporting by Ariane Luthi)
