The recent legislative proposal mandates that UBS must fully capitalize its foreign units within a timeframe of six to eight years after the law's enactment. This requirement aligns with expectations from analysts, lawmakers, and industry executives, who have long been advocating for stricter capital regulations in the banking sector.
Following the announcement on Friday afternoon, UBS shares experienced a significant surge, climbing as much as 7%. This marked the bank's best day since May 2024, despite its shares lagging behind European competitors amid ongoing uncertainty regarding the capital proposals. However, UBS officials have criticized the new capital plan, describing it as extreme and out of sync with international standards.
The Swiss government argues that the proposed capital requirements will enable UBS to decrease its holdings of Additional Tier 1 (AT1) bonds by $8 billion. Currently, UBS is only required to capitalize 60% of its foreign units, with the option to utilize AT1 debt to meet this obligation. UBS executives caution that the increased capital burden will disadvantage the Zurich-based bank in comparison to its rivals, ultimately undermining Switzerland's appeal as a leading financial center.
The shock from Credit Suisse's collapse in 2023 prompted a robust response from Swiss politicians, led by Finance Minister Karin Keller-Sutter. She pledged to implement stronger regulations to safeguard taxpayers and prevent similar financial disasters in the future. As Keller-Sutter now holds Switzerland's rotating one-year presidency, Friday's proposal is set to initiate a prolonged period of political debate over these crucial measures, which the federal council has deemed targeted and proportionate for ensuring financial stability.
The federal council plans to present draft proposals for stakeholder consultations in the latter half of 2025. Officials from the Finance Ministry have indicated that laws requiring parliamentary approval will not take effect before 2028. However, separate governmental measures, known as ordinances, may be implemented as early as 2027. The government has determined that a six to eight-year transition period is suitable for UBS to comply with the new regulations regarding the capitalization of its foreign units, potentially extending compliance deadlines to the mid-2030s.
Internally, some sources at UBS have expressed concerns that the new capital regulations could render the bank an attractive target for acquisition. There are discussions within the bank about the possibility of relocating its headquarters outside of Switzerland. However, Keller-Sutter expressed her hope that UBS would remain in the country, emphasizing that such decisions ultimately rest with the company.
UBS has strongly opposed the proposed increase in capital requirements, claiming it would necessitate an additional $24 billion in CET1 capital. Analysts suggest that the new regulations could lead to a fundamental shift in UBS's business model, which currently emphasizes growth in the U.S. and Asia. To mitigate the impact of these regulations, UBS may consider asset sales or optimizing capital utilization across its operations.
In conjunction with these capital requirements, the Swiss government has also outlined reforms aimed at strengthening the market regulator FINMA. This includes measures to hold bankers accountable, granting the regulator the authority to impose fines, and simplifying the process for restricting pay and reclaiming bonuses. These proposed changes come years after similar measures were introduced by the European Union in response to the 2007-2009 financial crisis.
Furthermore, the government has suggested easing access to liquidity from the Swiss National Bank (SNB) and removing barriers to collateral transfers to the SNB. This multifaceted approach underscores Switzerland's commitment to bolstering the stability of its financial sector and protecting the economy and taxpayers.
As the situation develops, stakeholders will be closely monitoring UBS's responses and the broader implications for the Swiss banking sector.
