UBS could face higher capital rules under Swiss reforms

UBS Group faces a “substantial” increase in regulatory capital requirements under reforms that the Swiss government is advocating for in the wake of the collapse of Credit Suisse.

The Federal Council is proposing that systemically important Swiss banks must hold significantly more capital against their foreign units, according to a wide-ranging report on banking stability it released Wednesday. In addition, bank-specific capital levels should be boosted to take future risks more into account. 

UBS shares fell as much as 3.6% and were briefly halted in Zurich trading. 

The proposals are part of a sweeping response to Switzerland’s most severe financial crisis in over a decade, addressing a weakness that helped accelerate Credit Suisse’s demise last year. They also effectively single out UBS as the country’s sole globally systemic lender, setting the government on a collision course with executives who have pushed back against such a plan. 

“Under the currently applicable requirements, the UBS parent bank must provide 60% capital backing for participations in a foreign subsidiary,” the government said. “The Federal Council is aiming for a significant increase in this capital backing,” leading to a substantial increase in overall requirements, it said. 

UBS declined to comment on the changes. The capital rules also would apply to Switzerland’s other systemically important banks — Raiffeisen Group, Zuercher Kantonalbank, and PostFinance — though those institutions have a much lower international presence than UBS. 

The government can implement changes in the capital regime without further parliamentary approval. The implementation of the relevant ordinance would take place in 2026 at the earliest, according to a government official.  

Other changes, in particular with regard to handing more powers to financial regulator Finma, require the backing of lawmakers and will take at least a year longer. Lawmakers are conducting their own investigation into the crisis which is not expected to finish before the end of this year.

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The government supported giving the regulator a major new set of powers to intervene in the management of banks under what is known as a “senior managers regime.”

The system which exists in different forms in jurisdictions including the UK and Hong Kong, enables regulators to identify individuals directly responsible for a bank’s actions. The collapse of Credit Suisse underlined how Finma has relatively few options to influence a bank’s decisions before a crisis occurs. 

The government however stopped short at giving its full backing to proposals that would enable Finma to fine banks, instead saying the possibility should be examined. That tool is more or less standard at global peers, but has long been eschewed in Switzerland on the basis that it discourages cooperation with supervisors. The government explicitly said it is against giving Finma the power to fine individuals. 

“Certain measures including the possibility of fines for Finma are still being examined,” Finance Minister Karin Keller-Sutter said at a press conference in Bern on Wednesday. “That doesn’t mean that we don’t want them, but only that there are still open questions.”

The government did back a greater ability to curtail banker bonuses. UBS in particular received criticism domestically over its compensation policy for 2023, the year in which it received state backing for its takeover of Credit Suisse. While overall bonuses shrank in the year, top executives had bigger awards, with CEO Sergio Ermotti becoming the top paid bank boss in Europe.

The capital and liquidity requirements in the revamp are separate from those resulting from the final implementation next year of global rules known as Basel III. Swiss regulation already distinguishes between global and domestically-significant banks, giving officials the ability to put UBS, with a balance sheet twice the size of the local economy, in its own category. 

In its rationale for a stricter approach to the capital requirements for foreign units, the government pointed to its experience of Credit Suisse’s collapse. 

“Foreign participations in particular had to be revalued and consequently written down significantly,” it said. “This incomplete capital backing of foreign participations also meant that the strategic room for maneuver was critically restricted.”

The Federal Council said that full capital backing for foreign units could be achieved either by deducting the participations from regulatory capital or by increasing the risk weighting associated with those units. 

In either case, capital requirements on UBS will increase were it “to retain its current size and structure, or even grow,” according to the report. “The new requirements reduce the incentive to set up complex corporate structures.” UBS had a CET1 ratio, a core measure of financial strength, of 14.5% at the end of the fourth quarter.

Last year a cross-parliamentary alliance formed to censure the government’s guarantees protecting UBS’s takeover, suggesting that lawmakers are largely in favor of reforms directed against large banks. Still, barely any lawmaker has spoken out in favor of any specific measure so it’s likely that the government’s plan will hit roadblocks on its way.

UBS chairman Colm Kelleher has already argued against higher capital requirements in an interview with the Neue Zurcher Zeitung last month. 

“If you have too much capital, you penalize the shareholders, but also the clients, because banking services become more expensive,” he said. “We already have capital buffers that are well above the regulatory minimum.”