Swiss lawmakers are considering a compromise that could significantly reduce the cost for UBS Group AG to meet the government's proposed $20 billion capital demand. A parliamentary committee is focusing on reforms to Additional Tier 1 (AT1) convertible bonds. These changes would enable AT1 instruments to absorb losses earlier in a crisis, a function they notably failed to perform during the Credit Suisse collapse three years ago. This approach is viewed as a cheaper form of bank funding compared to equity capital.
The proposed compromise involves tweaking hybrid capital instruments like AT1s to enhance their loss-absorbing capabilities, making them more akin to equity capital without rendering them useless as an asset class. UBS itself has subtly pushed for a solution that utilizes more AT1 debt, stating its support for strengthening these instruments if aligned with international standards. However, the Swiss National Bank (SNB) and Finance Minister Karin Keller-Sutter have expressed reservations, arguing that only "hard equity capital" (Common Equity Tier 1 or CET1) provides true loss absorption in a crisis. The SNB's vice-president, Antoine Martin, emphasized that the government's tougher proposal for full backing of foreign participations with CET1 capital would make the Swiss financial market more resilient.
A parliamentary committee on economic affairs and taxation failed to reach an agreement on new banking regulations for UBS in a previous meeting but was scheduled to reconvene on August 31. The debate centers on allowing UBS to use AT1 capital to meet part of the $20 billion additional capital requirement, which the bank argues is excessive and would harm its competitiveness. Currently, UBS is required to capitalize its foreign subsidiaries at 60%, with the proposal aiming for full capitalization using CET1. Lawmakers are discussing strengthening AT1 instruments by introducing higher regulatory trigger points, which could require UBS to suspend payouts if its capital ratio falls below a specific threshold, thereby enhancing their loss-absorbing capacity.
While the Swiss People's Party, the largest in parliament, has backed a proposal allowing UBS to use AT1s for some new capital requirements, no final decisions are expected before next year. The ongoing discussions highlight a tension between making the financial system more resilient with high-quality capital and ensuring the competitiveness of UBS with potentially cheaper, albeit less secure, forms of capital. The committee's decision will likely set the tone for further parliamentary deliberations on new capital rules for the bank.
