Swiss Finance Minister Opposed to AT1 Compromise for UBS

(Bloomberg) — Switzerland’s finance minister says she opposes a compromise proposal floated by lawmakers as part of the debate about new capital requirements for UBS Group AG, dashing hopes her stance had softened on the issue.

The idea to partially use AT1 bonds instead of CET1 capital to provide full capital backing for foreign subsidiaries “doesn’t solve the problem,” Karin Keller-Sutter said in an interview with Swiss news outlet Finanz und Wirtschaft published on Friday.

UBS shares extended losses on the comments, falling as much as 2.9% in Zurich. They were trading 2.2% lower at 5:19 p.m. in Zurich.

Switzerland is debating how much in additional capital UBS should hold after it took over former rival Credit Suisse in a government-engineered emergency deal three years ago. The package pursued by the finance ministry includes a requirement for the bank to provide full capital backing at its Swiss entity for its subsidiaries abroad, a move that would increase the capital requirements by an estimated $23 billion.

UBS has rejected the plan saying it would render it uncompetitive. That position has gained support from some lawmakers, and a group of them presented a compromise proposal that would allow UBS to use AT1s — a type of junior debt — to partially meet the new requirement, which could lower the costs. The Swiss government’s proposal currently says it can only use equity capital, which can absorb losses more readily.

JPMorgan analysts estimated in December that the AT1 rule tweak would mean UBS would only have to raise the additional $400 million in equity capital although it would also require UBS to raise almost $16 billion in new AT1 capital.

That plan “effectively wouldn’t be an improvement on today’s situation,” Keller-Sutter said in the interview. She said the conditions that underpin AT1s make it unsuitable for the proposed purpose.

Keller-Sutter also pushed back against the notion that there’s a united “front” against her reform package, saying that several parties back the “general thrust” of the package. She also said that there are lawmakers who have advocated for even tougher reforms.

Here’s a summary of key points Keller-Sutter made about the UBS capital reform in the interview

The result of that AT1 proposal “would be an uncertain instrument that would ultimately cost the bank as much as stable, hard core capital and, if used, would further unsettle the markets” The finance ministry’s plans for bank capital reform is “a good foundation” for further discussion in Switzerland’s Federal Council The plan to have full capital backing for foreign subsidiaries at the Swiss entity “fixes a mistake in the existing regulation.” The current status quo means that “Switzerland indirectly funds the growth of UBS’s US business” because losses at its foreign units can “weaken” the Swiss parent The amount of new capital that UBS would have to hold is “much less dramatic” than the bank claims, and its claim that the new package would lead to a “massive disadvantage” for it internationally is not true Even though the reforms may make it “more expensive” for UBS to grow its US investment banking business, “risk must have a price” Switzerland “can’t stop UBS” if it were to relocate its headquarters elsewhere, but such a move would be “highly complex” Even if UBS were to move, its Swiss business would still be systemically relevant for the country and would probably need full equity capital backing “I’m in touch” with UBS Chairman Colm Kelleher and “last met him at the end of October” (Adds key comments in bullet points at end of story.)

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