UBS Group AG is awaiting clarity this week from Swiss lawmakers regarding potential relaxations to government proposals for capital reform. The Economic Affairs and Taxation Committee of the upper house in Bern is set to discuss modifications to a draft bill, with current indications pointing towards a watering down of the original text. Options being considered include reducing the extra capital UBS would need or allowing the bank to use bonds for up to 50% of the requirement instead of equity. The original government proposal, which UBS has strongly opposed, mandates that the bank hold the full book value of its foreign units in equity capital at home, potentially requiring an additional $20 billion in top-quality CET1 capital.
The parliamentary committee is debating lowering the prescribed CET1 backing of foreign units to 75% or 80%, or linking it to the size of UBS's foreign operations. While a broad consensus exists on the committee for increasing capital requirements from current levels, it is likely that the government's initial proposal will be softened. UBS has argued that the "extreme" reforms would harm its competitive position and the Swiss economy, gaining sympathy among some lawmakers, particularly from the center-right. These lawmakers are advocating for an alternative that permits the use of AT1 bonds for up to half of the capital backing for foreign units, which could be cheaper for UBS than equity capital.
This alternative AT1 bond proposal, previously rejected by the government, has been amended with safeguards to enhance its loss-absorbing capabilities. These safeguards include banning coupon payments on the bonds and shareholder payouts if the bank’s capital ratio falls below a certain threshold, addressing issues observed during the Credit Suisse collapse. The Swiss National Bank, however, supports stricter capital rules, with Vice Chairman Antoine Martin emphasizing the need for robust "too big to fail" regulations due to the increased concentration in the banking sector following UBS's acquisition of Credit Suisse in 2023. Martin highlighted that UBS's share of the Swiss deposit and loan market rose significantly after the acquisition, necessitating stronger measures for financial stability.
The legislative process for these reforms is expected to conclude next year. A compromise proposal, supported by the Swiss People's Party (SVP), suggests allowing UBS to use convertible AT1 bonds for some capital requirements. This could significantly reduce the need for new equity capital. Analysts at JPMorgan Chase & Co. estimate that such a compromise could cut UBS's need for CET1 capital to approximately $400 million, a substantial decrease from the government's initial proposal of around $20 billion to $26 billion in additional capital. The government itself has indicated willingness to soften other parts of its reform package, such as those concerning intangible capital, which could reduce requirements by an estimated $3 billion. However, Finance Minister Karin Keller-Sutter has expressed doubts about increased use of bail-in bonds given their uncertain record in past banking crises.
