What exactly are AT1 (Additional Tier 1) bonds?

AT1 bonds are hybrid financing instruments that offer high returns to underwriters. In case of difficulty of the issuing bank, they can be converted into shares or declared worthless. Unlike first-class own funds (CET-1), AT1s present a higher risk: during the Credit Suisse crisis, AT1s were declared worthless, teaching investors that these instruments do not guarantee capital recovery.

Why did the Commission choose the 50-50 compromise between CET-1 and AT1?

CET-S resolved to balance two needs: to better protect taxpayers from unhedged banking risks, but without imposing excessive constraints on the competitiveness of UBS and the Swiss economy. The Federal Council had proposed 100% in CET-1, but the Commission considered that the partial use of AT1 allowed prudential rigor to be maintained without "over-regulation".

When will the new rules go into effect?

The decision of the CET-S (of 31 August 2026) has yet to be approved by the plenum of the Council of States and follow the ordinary parliamentary procedure. It is not yet specified when the legislation will come into force. The timing depends on the subsequent legislative steps in the Swiss Parliament.

What impact will it have on who holds deposits at UBS?

The new rules, if approved, will require UBS to better cover its foreign holdings. This should reduce the risk of the bank suffering massive losses on unprotected foreign investments, theoretically increasing deposit security. However, the use of AT1s introduces an element of complexity: if the bank were to face a serious crisis, the value of AT1s could go to zero, as happened with Credit Suisse.

What does it mean that the current coverage is 60% and how does it change?

Currently, UBS and the other systemic banks have to cover 60% of their foreign holdings with their own funds. The new CET-S legislation would raise this level: 50% should be covered with CET-1 (stable capital) and 50% with AT1 (convertible bonds). The exact level of total coverage is not yet fully specified by the Commission text.

UBS: new banking rules, the Commission's compromise

Di Redazione Frontaliere Ticino · Published on 31 August 2026

Swiss bank office with screens displaying market data: new financial regulation rules

31 August 2026: CET-S approves stricter rules on foreign holdings of large banks, with 50% coverage in AT1 instead of 100% as proposed by the Federal Council.

Context

In brief

The Economic Affairs Committee of the Council of States approves stricter rules for systemic banks (primarily UBS)
Compromise: 50% coverage with CET-1 own funds + 50% with AT1 bonds
Vote: 10 in favour, 2 against; the decision is not 'a gift to UBS'
Currently, a capital coverage of 60% applies to foreign participations

Key facts

What: New rules on foreign participations of systemic banks
When: 31 August 2026
Where: Economic Affairs and Taxation Committee of the Council of States (Bern)
Who: CET-S (chairman Erich Ettlin, Centre/OW)
Amount: 50% coverage in CET-1 + 50% in AT1 (vs. federal proposal of 100% CET-1)
Votes: 10 in favour, 2 against

The Committee's decision

Bern, 31 August 2026. The Economic Affairs and Taxation Committee of the Council of States (CET-S) has approved a new regulation on foreign participations of large Swiss banks. According to the committee, systemic institutions — currently mainly UBS — must be subject to stricter rules on the coverage of these investments, but not at the level required by the Federal Council.

The Federal Council had proposed a coverage requirement of 100% through Common Equity Tier 1 (CET-1) own funds. The CET-S opted for a compromise: banks will cover half of their foreign participations with CET-1 own funds, and the other half through so-called AT1 bonds (Additional Tier 1). These are hybrid instruments that offer a high yield and can be converted into equity or declared worthless in the event of the company's distress — a scenario similar to what happened during the Credit Suisse crisis.

The committee vote recorded 10 votes in favour and 2 against. CET-S chairman Erich Ettlin (Centre/OW) stressed at a press conference that the decision represents 'a compromise' and not a gift to UBS. The purchase of AT1 entails costs for the bank, but Ettlin specified that the amount of such costs remains to be defined. The bank itself had strongly opposed the government proposal.

Today, banks must maintain capital coverage of 60% for foreign participations. The new rule would raise this level, although it does not reach the total requirement requested by the Federal Council. Ettlin also communicated that the Committee was unable to examine the Public Liquidity Backstop mechanism during its work.

Balancing protection and competitiveness

According to Ettlin, the Committee's choice aims to 'strengthen the rules to better protect taxpayers, but also to ensure that the economy is not subject to excessive regulation'. This balance is central to the debate on Swiss banking supervision: on the one hand, the need to protect the financial system and savers from systemic risks; on the other, the concern that overly restrictive rules could compromise the international competitiveness of Swiss institutions.

Operational details

What AT1 Bonds Are and Why They Matter

To understand the CET-S compromise, one must first clarify the nature of AT1 bonds. Unlike Common Equity Tier-1 (CET-1) capital, which represents the most stable core capital of a bank, AT1 instruments are hybrid securities. They offer interest rates higher than conventional bonds, but they carry significant risks for those who hold them.

During the Credit Suisse crisis, AT1 bonds were declared worthless — a rare event that concretely demonstrated how these instruments do not guarantee capital safety. In the event of a bank's difficulties, the investor holding AT1s may lose it all, or see them converted into shares with drastically reduced value. This is why their use as a form of capital coverage is controversial: they do not offer the same level of protection as CET-1.

The Federal Council's proposal (100% CET-1) was more stringent and would have required UBS to accumulate significant amounts of capital as reserves. The Commission, on the other hand, considered that partial recourse to AT1s would allow a balance between two competing needs: maintaining prudential oversight over liquidity and capital stability, without forcing the bank to retain abnormally large volumes of CET-1 — resources it could otherwise deploy in profitable activities.

Implications for the National Banking System

This decision primarily concerns UBS, but it signals a broader stance by the Swiss supervisory authorities. The Council of States (and by extension the Swiss Parliament) intends to tighten the discipline on systemically important banks without, however, strangling them with excessive constraints. The Commission chose to also involve market instruments (the AT1s) within the perimeter of protection, entrusting the market with the pricing of the associated risks.

For savers and investors, this choice carries a dual implication. On the one hand, more stringent rules on foreign participations reduce the likelihood that a large bank will accumulate massive losses on foreign investments without adequate coverage. On the other, the use of AT1s introduces an element of uncertainty: those who hold these securities know that, in a severe banking crisis scenario, their investment could be wiped out or converted into shares at nominal value.

The current coverage level (60%, which the Commission intended to raise) represented a previous compromise. With the new rules — still to be approved in plenary session — the parameter will rise, better protecting the system from uncovered exposures. However, the fact that UBS is not required to cover 100% with CET-1 means that the bank will retain a certain flexibility in managing its balance sheet and investment strategies.

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Key points

What savers and investors need to know

This decision by the CET-S will have a long-term effect, as it still needs to be approved by the full Council of States and may be subject to further modifications. However, anyone holding deposits at UBS or owning Swiss bank securities should keep a few elements in mind.

First: the new rule is aimed at better protecting depositors from risks related to uncovered foreign participations. If applied, the rules will reduce the bank's unsecured exposure, which theoretically increases the security of deposits within the Swiss system. Second: if you hold AT1 instruments issued by UBS or other systemically important banks, be aware that the value of these instruments depends on the solvency of the issuing bank. In a financial stress scenario, the value of AT1 instruments can collapse or be wiped out, as happened with Credit Suisse.

Third: CET-S decisions reflect a global trend towards greater rigour in banking supervision. This is not an isolated phenomenon in Switzerland, but part of an international orientation. If you work in the financial sector, the new rules will entail stricter compliance requirements and demand close attention to internal risk management processes.

Next steps and what to monitor

The Commission's decision, although important, is not yet law. The text must be submitted to the full Council of States for final approval. After the Council of States, the procedure will follow the ordinary legislative paths, possibly including a meeting with the National Council (the lower house of the Swiss Parliament). Further modifications may emerge during this process.

Ettlin also pointed out that the Commission did not have time to examine the Public Liquidity Backstop mechanism, an issue closely related to the protection of banking stability. This topic could return to the agenda in the future.

If you are a saver or investor interested in the dynamics of the Swiss financial sector, it is worth monitoring parliamentary developments over the coming months. You can consult the Swiss Parliament website or the official Confederation portal to follow the legislative process. In the meantime, if you hold AT1 instruments or other hybrid securities, assess the risk profile together with a qualified financial advisor. For broader planning of your wealth and pension situation, use our financial planning calculator to analyse how your investment choices align with your long-term goals.

Finally, remember that decisions on banking supervision also indirectly affect bank competitiveness and profits, which in turn impact dividends and returns for shareholders. If you hold UBS shares, stay informed on how the new capital constraints could redefine the bank's capital return strategy. Explore your banking investment options in Switzerland to better orient yourself in the market.

Source: tio.ch

Frequently Asked Questions

What exactly are AT1 (Additional Tier 1) bonds?: AT1 bonds are hybrid financing instruments that offer high returns to underwriters. In case of difficulty of the issuing bank, they can be converted into shares or declared worthless. Unlike first-class own funds (CET-1), AT1s present a higher risk: during the Credit Suisse crisis, AT1s were declared worthless, teaching investors that these instruments do not guarantee capital recovery.
Why did the Commission choose the 50-50 compromise between CET-1 and AT1?: CET-S resolved to balance two needs: to better protect taxpayers from unhedged banking risks, but without imposing excessive constraints on the competitiveness of UBS and the Swiss economy. The Federal Council had proposed 100% in CET-1, but the Commission considered that the partial use of AT1 allowed prudential rigor to be maintained without "over-regulation".
When will the new rules go into effect?: The decision of the CET-S (of 31 August 2026) has yet to be approved by the plenum of the Council of States and follow the ordinary parliamentary procedure. It is not yet specified when the legislation will come into force. The timing depends on the subsequent legislative steps in the Swiss Parliament.
What impact will it have on who holds deposits at UBS?: The new rules, if approved, will require UBS to better cover its foreign holdings. This should reduce the risk of the bank suffering massive losses on unprotected foreign investments, theoretically increasing deposit security. However, the use of AT1s introduces an element of complexity: if the bank were to face a serious crisis, the value of AT1s could go to zero, as happened with Credit Suisse.
What does it mean that the current coverage is 60% and how does it change?: Currently, UBS and the other systemic banks have to cover 60% of their foreign holdings with their own funds. The new CET-S legislation would raise this level: 50% should be covered with CET-1 (stable capital) and 50% with AT1 (convertible bonds). The exact level of total coverage is not yet fully specified by the Commission text.