In an effort to lower the possibility of another Credit Suisse-style collapse, the Swiss government has suggested raising UBS’s capital requirements by up to $26 billion. UBS has referred to this proposal as “extreme” and unfair.
Despite a public lobbying effort by the bank’s management to soften the reforms, Switzerland’s Federal Department of Finance (FDF) said on Friday that it intended to compel UBS to properly capitalize its overseas subsidiaries as part of a comprehensive package of financial sector reforms.
The FDF stated that the Swiss parent bank’s capital base was inadequate, as demonstrated by the Credit Suisse catastrophe.
“The package’s implementation aims to significantly lower the probability that another systemically important Swiss bank will experience a serious crisis and that the state will need to take emergency action.”
Currently, UBS, which acquired rival Credit Suisse in 2023 through a state-sponsored rescue, must match 60% of the capital at its foreign subsidiaries with parent bank capital.
According to the FDF, UBS would have to raise its common equity tier one capital by roughly $26 billion in order to satisfy the new 100% criteria.
However, the bank would have a net increase in “going concern” capital of $18 billion after being permitted to cut its holdings of AT1 bonds by $8 billion.
According to the FDF, this forecast was based on data from 2024 and anticipated that UBS’s risk-weighted assets, balance sheet size, and possible usage of mitigation strategies would remain unchanged. UBS estimates that the proposed revisions will result in a $24 billion rise in its capital requirements.
UBS “strongly disagrees with the extreme increase in capital requirements that has been proposed,” the bank said in a statement on Friday. “These adjustments would lead to capital requirements that are neither proportionate nor globally aligned,” it continued.
The “too big to fail” plans, which are now awaiting parliamentary approval, follow Switzerland’s banking regulator’s 2017 capital relief grant to Credit Suisse, which effectively let the bank to inflate the value of its overseas subsidiaries. Last year, a legislative investigation referred to the action as “incomprehensible.”
Before being presented to parliament, the new capital ideas will be made available for consultation in the fall. The FDF stated that the reforms would be enacted “at the earliest” in early 2028, and that UBS would have “at least six to eight years” to put the measures into effect after the law is passed.
Since the reforms were first proposed in April of last year, UBS has been embroiled in a public dispute with the Swiss government and its authorities. Now, the company will have another chance to urge lawmakers to weaken the measures.
One politician from the upper chamber stated, “We are getting ready for negotiations to last for years, and the real lobbying starts now.” “In the past, it has been known to persuade Parliament.”
The bank’s share price has been affected by the uncertainty around the proposed revisions, and its management has contended that higher capital requirements will hurt the bank’s capacity to compete globally.
“UBS can still expand overseas,” the FDF stated. “However, in the future, foreign subsidiary value increases or the acquisition of additional foreign subsidiaries will need to be fully funded by capital and can no longer be partially financed with debt at the parent bank’s expense.”
After rising as much as 6% in response to the suggestions on Friday, UBS shares ended the day 3.8% higher.
The FDF stated that it would suggest “a targeted strengthening of the quality of banks’… capital base” in addition to the capital reforms. This covers the handling of assets like deferred tax assets and internal software expenses that are not adequately recoverable in a crisis.
The “regulatory treatment of [these] assets” should be tightened, according to the statement, which means UBS will also need to increase its capital as a result of these modifications. This portion of the package is expected to go into effect by early 2027 and will be enacted through an executive order or government ordinance.
Measures to strengthen the regulator’s authority and hold senior bankers accountable are part of another set of changes that will be presented to lawmakers next year.
In order to prevent wrongdoing by associating responsibilities with possible penalties, the package would establish a senior managers regime for all banks to define roles at the highest levels — board and executive board.
Along with giving the regulator more options to step in early when problems arise, such as limiting dividends and capital requirements, it also suggests giving the agency the authority to sanction banks. Additionally, systemically important banks have implemented clawbacks for bonus payments in the event of misbehavior.
The political parties in Switzerland disagree about how to strengthen UBS’s defenses.
For instance, the ruling Swiss People’s party has voiced concerns about the effects of regulatory changes, and some MPs have suggested capping the size of the lender’s investment bank instead. While left-wing parties demand significantly stricter capital and liquidity rules, the Liberals have expressed worries about future competitiveness.
The package may yet be placed to a nationwide vote under the Swiss democratic system. If 50,000 signatures are gathered in the nation of nearly 9 million people, a bill passed by parliament may be challenged in a referendum. This would either repeal the law completely or postpone implementation until 2029.
“We won’t sugarcoat it — we are disappointed by today’s announcement,” stated chair Colm Kelleher and CEO Sergio Ermotti in a note to UBS employees obtained by the Financial Times.
They went on to say, “We will not back down.” “This is the start of a lengthy process that will see many people scrutinizing our company even more.”