UBS faces $20B capital hit as Swiss lawmakers weigh new rules

Swiss lawmakers next month will begin drafting new capital rules for UBS that are expected to reduce the government's proposed $20 billion buffer requirement, as parliament seeks to protect taxpayers without hobbling the nation's largest lender against U.S. rivals.

"We certainly don't want to put taxpayers' money at risk for a possible bank bailout, but we also mustn't weaken UBS unnecessarily," said Fabio Regazzi, a lawmaker of the Centre party that will be decisive in crafting a majority. "I'm confident we'll find a compromise."

At meetings set for Aug. 10, 11 and 31, the upper house's Economic Affairs and Taxation Committee will consider lowering the government's requirement for UBS to back its foreign units with 100% Common Equity Tier 1 core capital to about 70%, 80% or even 50%, according to lawmakers. That could reduce the extra capital UBS must hold after a transition to anything from about $12 billion to zero.

The outcome carries high stakes for both UBS and Switzerland. The bank's balance sheet exceeds the size of the Swiss economy, meaning any failure could overwhelm the nation's safety net. Yet requiring too much capital risks driving UBS — which argues the $20 billion proposal puts it at a disadvantage against big U.S. banks — to shift investment and talent away from Switzerland. Final rules are expected to be adopted in parliament's December session at the earliest.

The Capital Calculus

UBS currently holds a CET1 ratio well above regulatory minimums, but the government's proposal would require it to fully back all foreign subsidiary exposures with the highest-quality capital — a standard the bank says no major global competitor faces. With so much capital tied up, UBS would have less money available for share buybacks, artificial intelligence investment or expansion in key markets, two people familiar with the bank's thinking told Reuters. Fees for Swiss clients could rise, one person said, while lower bonus payments could hurt the bank's ability to attract talent, a third source close to the bank said.

"It is our duty to evaluate appropriate measures to address, if confirmed, the negative effects of these extreme proposals," UBS Chair Colm Kelleher told shareholders in April.

The Swiss National Bank has pushed back against any dilution of the rules, saying this month that partial backing of foreign units implies some capital must cover risks at both the parent bank and its foreign subsidiaries, contravening financial prudence. Other regulatory experts have echoed those concerns, a stance that could bolster the case for a higher percentage of required CET1 capital, parliamentary sources said.

AT1 Bonds as a Compromise

To find middle ground, lawmakers are likely to let UBS partly use Additional Tier 1 capital to back its foreign units. Cheaper to hold than CET1, AT1 debt is designed to absorb losses during crises but is also less secure. The committee is also set to consider introducing a new, higher regulatory trigger point that would require UBS to refrain from paying out investors if it dips below a minimum capital ratio, a measure aimed at improving the loss-absorbing capacity of AT1 bonds.

Financial stability experts say it is not clear whether such strengthened AT1 capital can help stabilize a struggling bank or only absorb losses as it is being wound down. Nevertheless, AT1 could be the compromise Swiss lawmakers choose to reach full capitalization of UBS' foreign units without imposing a CET1 capital burden they fear will hurt the bank.

The last time Switzerland imposed major post-crisis banking rules — following the 2008 financial crisis — the "too big to fail" framework required systemically relevant banks to hold additional capital buffers. UBS, then a smaller institution relative to the economy, complied without the competitive friction now at the center of the debate. The current rules, drafted in response to the 2023 collapse of Credit Suisse and its subsequent takeover by UBS, represent the most significant overhaul of Swiss banking regulation in more than a decade.

This article is for informational purposes only and does not constitute investment advice.