The Swiss government has proposed to raise UBS' capital requirements by $18 billion to reduce the risk of a collapse in Swiss-style credit style, a move UBS had previously called "extreme" and "excessive".
The Swiss Federal Ministry of Finance (FDF) said Friday that despite public lobbying campaigns by bank management, it forced UBS to fully utilize its foreign subsidiaries as part of a package of extensive reforms to the country's financial sector to dilute the changes.
"The Credit Suisse crisis clearly demonstrates that the Swiss parent bank has a insufficient capital base," the FDF said.
“The implementation of a range of measures aims to greatly reduce the likelihood that another important bank in Switzerland will fall into a serious crisis and requires urgent measures from the state.”
Currently, UBS has taken over Credit Suisse in a state-sponsored rescue in 2023 and must match 60% of its international subsidiary's capital to the parent bank's capital.
To meet the new 100% requirement, UBS will need to increase its common stock Tier 1 capital by about $2.6 billion, the FDF said. However, the bank will be allowed to reduce its AT1 bond holdings by $8 billion, but the net increase in capital by $18 billion.
The FDF said this is based on estimates for 2024 data and assumes that UBS balance sheet size, risk-weighted assets, or its potential use mitigation measures have not changed.
The proposal to “too big to fail” was still approved by parliament after Switzerland’s financial regulator awarded credit relief in 2017, which actually allowed the bank to inflate the value of its foreign subsidiaries. A parliamentary report last year called the move “uncomprehensible”.
A new capital proposal will be proposed in the fall for consultation before submitting to Parliament. The FDF said the reforms would become law "as early as" in early 2028, and once legislation takes effect, UBS will receive a transition period of "at least six to eight years" to implement the changes.
Switzerland's proposal briefly
100% deduction from foreign subsidiaries of CET1 Capital
CET1 needs to increase by $26 billion
UBS can reduce AT1 bond holdings by $8 billion
Six to eight years from 2028
AT1 bonds (can be converted to equity when banks are in trouble) are removed by dispute before Credit Suisse rescue shareholders
New senior manager system and bonus bankruptcy proposals
UBS has been in open disputes with the Swiss government and its regulators since the reform first floated last April, and there will now be further opportunities to lobby lawmakers to reduce changes.
"The real lobbying begins and we are preparing for negotiations for years," said a MP from the House of Lords. "It is well known in the past that the parliament was convinced."
The uncertainty surrounding the plan changes is commensurate with the bank's share price, while its management believes that additional capital requirements will undermine its ability to compete internationally.
"Growth abroad is still possible (for UBS)," the FDF said. "However, in the future, the value of foreign subsidiaries or the purchase of further foreign subsidiaries will have to be fully covered by capital and will no longer be partly financed at the expense of the parent bank."
In addition to capital reform, the FDF will propose “targeted strengthening bank quality”…… capital basis”. This includes handling of assets that cannot be fully recovered in a crisis, such as internal software costs and deferred tax assets.
It said, “the regulatory handling of (these) assets should be stepped up”, meaning that due to these changes, UBS will be asked to add more funds. This part of the program will be implemented through government regulations or executive orders and may come into effect in early 2027.
Next year, it will participate in another set of amendments to parliament, including measures to increase regulator power and hold top bankers.
The plan will introduce a senior manager system to all banks to clarify the highest levels of responsibility – the board of directors and the executive committee – to preempt misconduct by linking liability to potential sanctions.
It also recommends that regulators provide more tools to intervene in the event of risks, including imposing restrictions on dividend and capital requirements. In case of misconduct, kickbacks will also be introduced in important banks on the system.
How Swiss parties build UBS’s defensive capabilities.
For example, the main Swiss BJP expressed concerns about the impact of regulatory changes, while some lawmakers suggested limiting the size of lenders' investment banks. Liberals raise concerns about future competitiveness, while left-wing parties support stronger capital and liquidity requirements.
Swiss democracy means that the program can still be put into national votes. If 50,000 signatures were collected in a country with nearly 9 MN people, the bill passed by the parliament could be challenged by a referendum. This will delay the law until 2029, or kill it altogether.
UBS did not immediately comment on the proposed reform.