Swiss lawmakers are indicating a willingness to water down stringent new capital requirements proposed for UBS, a move that would ease the financial burden on the bank. Senior parliamentarians have privately assured UBS executives they will find a compromise to the finance ministry's proposals, which aimed to increase the bank's capital by $22 billion (CHF17.6 billion). This development has caused UBS shares to climb around 3%, although they remain down nearly 18% this year.
The proposed "too big to fail" reform package was introduced last year by Swiss Finance Minister Karin Keller-Sutter in response to the 2023 collapse of Credit Suisse. While regulators argue these rules are crucial for depositor protection, UBS and other critics contend they would harm Switzerland's competitiveness and make the bank more strictly regulated than its peers in the U.S. and U.K. UBS executives have expressed frustration with the government's perceived inflexibility and are now placing their hopes on parliamentary intervention.
The reform package has two main components. The first involves ordinance changes focusing on the quality of UBS's capital, tightening the treatment of deferred tax assets, in-house software, and other hard-to-value assets. This component would add between $2 billion and $3 billion to core capital requirements, though analysts estimate the broader impact could reach $11 billion due to restrictions on what counts as regulatory capital. The second, and more contentious, component requires UBS to hold substantially more capital for its international operations, specifically increasing equity backing for foreign subsidiaries. This is designed to ensure these units can be stabilized or resolved independently during a crisis, without relying on the Swiss parent.
Lawmakers have greater influence over the larger foreign subsidiary capital component, which currently accounts for a $20 billion to $22 billion proposed increase, making it the primary area for potential reduction. A key parliamentary economic affairs and taxation committee is expected to take up this process, with a decision anticipated next month. Potential compromises could include allowing UBS to use Additional Tier 1 (AT1) capital for foreign unit backing, which is cheaper to hold than Common Equity Tier 1 (CET1), or lowering the CET1 backing requirement for foreign units from 100% to 70%, 80%, or even 50%, potentially reducing the required buffer by $12 billion or more. The final rules could be passed by the end of 2026.
