Switzerland hits UBS with proposed $20bn capital increase

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The Swiss government has laid out plans that would force UBS to increase its capital by $20bn, refusing to back down on the core element of the “too big to fail” banking reforms sparked by the collapse of Credit Suisse.

Switzerland’s Federal Council said on Wednesday that, after a months-long consultation, it still wanted UBS to fully capitalise its foreign subsidiaries but would water down some proposals aimed at strengthening the quality of UBS’s capital base.

“The solution proposed by the Federal Council is more moderate than planned, due to the results of the consultation procedure,” it said. “In terms of capital requirements, the result is thus a balanced overall package that takes account of the comments received.”

The partial compromise reflects months of pushback from UBS and business groups, which argued that earlier proposals would have imposed an excessive burden on the bank and put it at a disadvantage to international rivals.

However, UBS said that it continued to disagree with the proposed measures. The lender said the package “is extreme, lacks international alignment and disregards concerns expressed by the majority of respondents” to the government’s consultations.

The Swiss Bankers Association called the proposal “extremely problematic”. It said: “The Federal Council is ignoring the predominantly critical feedback from the consultation process, particularly from the real economy and some 16 cantons.”

Under the revised rules, the government has eased requirements on the treatment of certain balance-sheet items such as software, aligning them more closely with international standards and giving UBS more time to adjust.

The Federal Council said the latest reforms would increase UBS’s core capital requirements by about $20bn, lower than its projection of $26bn last June when it presented its draft proposals.

UBS said the capital hit from the proposals would be closer to $22bn, adding that some analysis published by the Federal Council contained “assertions that we believe to be misleading”.

Switzerland is nonetheless taking a tougher approach than the US and some jurisdictions to banking regulation in response to the collapse of UBS’s rival, Credit Suisse, in 2023.

The Swiss bank is not just a large domestic lender; it spans global wealth management, investment banking and dollar funding markets. After absorbing Credit Suisse, its balance sheet now dwarfs Switzerland’s economy — giving it a scale that stretches the capacity of the small state to oversee it and raises the stakes in any future crisis.

The package of capital reforms comes in two parts.

The changes to the treatment of software and deferred tax assets (DTAs) will be pushed through by government ordinance, or decree, without the need for parliamentary approval.

The second part of the package contains the tougher capital demands on foreign subsidiaries. These proposals have to be debated by parliament, and could still be diluted as part of that process.

The reforms being implemented by ordinance are the less important of the two in terms of the impact on UBS’s capital. Under the government’s previous proposals, they would have wiped out about $11bn of UBS’s common equity tier one (CET1) capital at group level by discounting the value of DTAs and software.

However, the Federal Council said on Wednesday that the bank could continue counting DTAs towards its regulatory capital — scrapping the proposal “for the time being” — while software assets can be phased out of capital over three years, in line with EU rules. The new measures would wipe out about $4bn of net CET1, UBS said.

The ordinance measures will come into force from next January, while a two-year transition period will apply for the regulatory treatment of software.

The more significant part of the reform remains unchanged. The government wants UBS to be required to fully back the value of its foreign businesses with high-quality capital held at the Swiss parent bank, which would require about $20bn in additional CET1.

The aim is to stop losses in these overseas subsidiaries eating into the bank’s core capital and make it easier to sell parts of the business in a crisis without putting the whole bank at risk.

“In the future, systemically important banks in Switzerland will have to fully back their participations in foreign subsidiaries with CET1,” the Federal Council said.

That proposal will now go to parliament from June, kicking off a legislative process that could take years and may yet see it reshaped or diluted.

The debate is likely to be politically charged, with some on the left pushing for stricter capital rules, while others, including business groups and parts of the centre right, argue for a more moderate approach to avoid undermining UBS’s international competitiveness.

Karin Keller-Sutter, the Swiss finance minister who has spearheaded the reforms, said on Wednesday that the government had made significant concessions to UBS.

Swiss officials said on Wednesday they could revisit the ordinance measures — including the treatment of deferred tax assets — if parliament significantly watered down the foreign capital requirements.

However, the finance ministry was prepared to accept some degree of softening during the legislative process, the people said.

Shares in UBS closed 0.15 per cent higher in Zurich.