UBS challenges CET-S proposal on capital requirements (cross-border guide)

Context

In brief

• UBS welcomes CET-S but criticizes proposed capital requirements
• Proposal would result in $30 billion in additional capital
• CEO Ermotti: positive international AT1 alignment, negative costs
• Debate will continue in the coming months in Parliament

Key Facts

• Who: UBS and the Committee on Economic Affairs Council of States (CET-S)
• What: CET-S proposal on capital requirements; UBS appreciates work, criticizes costs
• When: Press release issued today; debate next months
• Where: Switzerland (financial centre, Federal Parliament)
• Amount: ~$30 billion in total additional Tier 1 capital
• Proposed regime: 50% CET1 + 50% AT1 for overseas subsidiaries
• Source: UBS (press release via Keystone-SDA)

UBS acknowledges the work of the Committee on Economic Affairs and Taxation of the Council of States (CET-S) on the new capital requirements, but has expressed a negative opinion on the concrete proposal. In a statement released today, the large Zurich-based bank argues that the CET-S recommendations would lead to a significant increase in costs for the company.

The figures of the CET-S proposal

The fee would oblige UBS to build up additional Tier 1 capital of around USD 13 billion, equivalent to around CHF 10 billion, to be covered by AT1 capital. This would be supplemented by an additional USD 2 billion of CET1 capital required by the ordinance amendments announced by the Federal Council. In addition, for the acquisition of Credit Suisse, UBS must maintain additional CET1 capital of around USD 15 billion, in accordance with the applicable rules. Overall, according to UBS's calculation, the institution is expected to build up around USD 30 billion of Tier 1 capital.

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Operational details

Implications for the Swiss economy

According to UBS, the CET-S proposal, along with a series of other regulatory measures, would further increase financing costs for the Swiss financial market and the entire Swiss economy. The bank has raised this concern in an international context where other major financial centers are instead simplifying and streamlining their regulatory frameworks for banks.

The increase in financing costs can have indirect effects on the entire national economy: investment projects become more expensive, small and medium-sized enterprises face higher interest rates for financing, and the competitiveness of the Swiss market could suffer compared to other global financial jurisdictions.

Three scenarios compared

The current regime (45% CET1 + 15% AT1) remains the most lenient for UBS in terms of capital structuring costs. The CET-S proposal (50% CET1 + 50% AT1) represents a compromise between the stricter requirements and the current ones, but it still involves a significant increase in the necessary capital. The original proposal of the Federal Council (100% CET1), advanced after the collapse of Credit Suisse, was the most stringent and would have been even more burdensome for the institution.

The CET-S has chosen to position itself halfway: it recognizes the need to tighten controls post-Credit Suisse, but seeks to do so in a less burdensome way for UBS and for the competitiveness of the market.

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Key points

What happens in the coming months

The public debate is expected to remain intense in the coming months, according to the UBS communication. The CET-S proposal will be discussed in parliament: starting with the committees and eventually going before the two chambers (National Council and Council of States). There is no formal deadline yet announced in the source, but the Swiss parliamentary process for complex regulatory matters can take several months.

UBS management said it will continue to ensure that the bank contributes constructively to the debate in the months ahead.

The role of the Federal Council

The Federal Council remains an important player in this matter. Changes are already announced at the ordinance level (not the law), which means that the federal executive has significant room for movement without necessarily going through parliament. However, the decision to require a capital structuring (50% CET1 + 50% AT1) by the CET-S suggests that parliament wants to have its say on an issue that it considers crucial for the stability of the Swiss banking system after the Credit Suisse crisis.

Concrete implications for savers

Although the topic of capital requirements may seem technical and far removed from everyday life, it has concrete repercussions. For savers, more solid and capitalized banks offer greater deposit security.

On the other hand, if borrowing costs were to rise significantly, the repercussions would extend to the real economy: more expensive mortgages, higher interest rates on personal loans, less credit availability for small businesses.

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