Swiss lawmakers are debating a compromise that could significantly reduce the cost for UBS Group AG to meet the government's demand for an additional $20 billion in capital. This proposal focuses on reforms to Additional Tier 1 (AT1) bonds, which are a cheaper form of bank funding than equity capital. Under this potential agreement, UBS could use AT1 bonds to cover up to half of the increased capital requirement. The bank itself has advocated for the strengthening of AT1 instruments, provided they align with international standards, arguing that the government's original "extreme proposals" would make them uncompetitive.
The discussions follow the collapse of Credit Suisse three years ago, where AT1 bonds failed to absorb losses effectively until after the bank was rescued by UBS. The proposed reforms aim to address this by making AT1s more robust, potentially by imposing losses earlier in a crisis and suspending coupon payments, shareholder dividends, and management bonuses if a bank's capital ratio drops. However, the Swiss National Bank (SNB) vice-president Antoine Martin has expressed opposition, advocating for the government's tougher proposal which requires "hard capital" (Common Equity Tier 1 or CET1 capital) to fully back foreign participations, arguing it makes the financial market more resilient. The SNB also believes higher capital requirements do not necessarily reduce bank profitability or competitiveness.
A parliamentary committee is currently deliberating on these proposals, with a decision expected by August 31. While there's a broad consensus among lawmakers that capital requirements for UBS should increase from current levels, the key question remains the extent to which AT1s can be utilized and strengthened to effectively absorb losses. Investors in AT1 debt are cautious about the Swiss proposal, concerned about increased issuance and potential changes to bond terms. The committee's decision, though an interim vote, is expected to set the tone for further parliamentary deliberations on new capital rules, a process not anticipated to conclude until next year.
