Swiss lawmakers are considering a compromise proposal that would enable UBS Group AG to meet as much as half of the government’s proposed $20 billion capital demand using Additional Tier 1 (AT1) bonds. This approach would be significantly less expensive for the bank compared to using only Common Equity Tier 1 (CET1) capital, potentially saving UBS billions. The parliamentary committee, which has been discussing these reforms, is expected to issue its stance on the proposals soon, with a vote anticipated on August 31st.
The debate centers on reforming AT1 bonds to enhance their loss-absorbing capabilities. Lawmakers aim to tweak these hybrid capital instruments to absorb losses earlier in a crisis, a function that was not effectively performed during the Credit Suisse collapse three years ago. Academics and some lawmakers propose that AT1s should impose losses at an earlier stage, for instance, by suspending coupons if a bank’s capital falls below regulatory requirements, well before the standard conversion trigger point.
However, this proposed compromise faces opposition, particularly from the Swiss National Bank (SNB). SNB Vice-President Antoine Martin has advocated for the government's original, tougher proposal, which requires foreign participations to be fully backed by "hard capital" (CET1). Martin argued that higher capital requirements do not necessarily reduce a bank's profitability or competitiveness, citing profitable US banks with high capital ratios. Finance Minister Karin Keller-Sutter has also expressed skepticism about AT1s suitability as "going concern" capital, emphasizing that only hard equity is truly loss-absorbing in such scenarios.
UBS, for its part, supports strengthening AT1 instruments if aligned with international standards but has labeled the Federal Council’s initial proposals as "extreme" and potentially damaging to its competitiveness. The bank is a significant player in the global AT1 market, with its debt accounting for about 7% of the $286 billion European market. While the committee's decision will likely influence the broader parliamentary deliberation, final decisions on new capital rules are not expected until next year at the earliest. The goal is to achieve internationally aligned AT1s that are accepted by the market, otherwise, they would be considered useless and require full equity backing.
