Swiss Government Bets on UBS Climb-Down in Capital Deadlock
(Bloomberg) — The Swiss government is entering the next stage of the political process to set new capital requirements for UBS Group AG, expecting that the bank will ultimately be forced to accept most of its demands.
As it prepares a draft law this year to go before parliament in 2027, officials have concluded that the impact of the new rules will be manageable for UBS and that the political will for stronger safeguards against potential future crises will outweigh concerns around the impact on UBS’s competitiveness, according to people familiar with the government’s thinking.
UBS, which manages almost $7 trillion in assets, bought its stricken rival Credit Suisse in an emergency $3 billion transaction in 2023. Yet its increased size and complexity quickly brought demands for much higher capital requirements, on the basis that its home nation could scarcely afford to bail it out again if ever needed.
Almost two years ago the government sparked an uproar over its proposal that UBS should completely insulate its domestic business from potential losses overseas. Despite the opposition from UBS’s leadership, who have called the measure “extreme” and argued it would hurt its international competitiveness, officials now are preparing a draft law that includes provision of full capital backing for the bank’s foreign units as the core of the reforms, said the people, who asked not to be named discussing internal deliberations.
That would entail an estimated $23 billion headline increase in UBS’s capital requirements, albeit with a implementation time of 7 years. Higher equity capital can improve a bank’s loss-absorbing capacity, acting as a bulwark in times of crisis. It can also make a firm less profitable compared with one financed with a greater share of debt.
UBS shares fell after the report before rising again, to trade at 37.03 Swiss francs ($48.145) at 4:35 p.m. in Zurich. The lender’s stock has recently surged on expectations of a more favorable outcome to the capital debate, having lagged regional peers for most of the last year.
As a potential compromise, the government is signaling that it is willing to soften another part of its reform package, which deals with so-called intangible capital such as deferred tax assets and software. Those measures, which according to government estimates would lead to a $3 billion increase in requirements if the larger package on foreign subsidiaries is enacted, don’t have to go through parliament.
A spokesperson for the Swiss government declined to comment on the plans. UBS didn’t immediately comment on the government’s stance, though it has comprehensively rejected the government’s analysis in its formal response earlier this month.
Finance Minister Karin Keller-Sutter has also in recent days shot down a mooted compromise proposal made by center-right politicians that would allow the bank to use more bail-in bonds to meet its capital needs. The suggestion, centering of increased use of AT1 bonds, has raised doubts given the debt’s uncertain record in past bank crises, including that of Credit Suisse.
UBS shares fell last week after Swiss newspaper Finanz und Wirtschaft published an interview with Keller-Sutter outlining her opposition to the AT1 proposal.
Despite a concerted effort — with some success recently — to win over politicians sympathetic to its argument that the new rules would hobble the bank in international comparison, UBS has gained little traction in the Federal Council, or cabinet. Keller-Sutter herself argued last week that UBS’s parent bank unit is already sitting on a substantial capital buffer in excess of regulatory requirements — some $13 billion — which makes it easier to meet the new rules.
Officials in the government have rankled at the perceived aggressiveness with which the nation’s largest bank has lobbied against the proposed reforms, the people said. In November, Chairman Colm Kelleher blasted the country publicly during an event in Hong Kong, saying the nation was having an “identity crisis” over its role in world banking.
Bloomberg has reported that the bank has drawn up its own hypothetical plans to leave Switzerland should the debate go against it, including through a major M&A deal, though Chief Executive Officer Sergio Ermotti and others have pushed back against those suggestions.
Still, a potential departure has been taken seriously enough by the government to prompt a joint effort with the Swiss National Bank, and the regulator, Finma, to examine such a scenario. The result, people familiar with the matter said, was that a relocation for one of the world’s largest banks was judged to be too complex and expensive to make it a rational response to tougher regulation.
That insight has emboldened the government to stick to its guns, and buttresses its assessment that parliament will ultimately back its stance. In addition, should the measures go to a national referendum — not an unlikely prospect in Switzerland’s consensus-based political system — the government is confident that the public will support its call for stricter regulation, given the recent memory of Credit Suisse’s chaotic downfall three years ago and UBS’s own bailout after 2008.
The capital challenge comes at a time of heightened strategic and leadership challenges for UBS. The bank is likely heading into the final year of Ermotti’s term, as he’s signaled he’ll step aside by early 2027 at the latest. Kelleher’s intent — signaled in 2024 — to line up a bench of internal candidates to succeed Ermotti has since broadened into a willingness to accept an outside candidate.
The bank’s main strategic priority — accelerated growth in the US — has met with mixed success so far amid strong competition from Wall Street rivals. Yet the bank continues to post strong results, with traders and wealth managers enjoying the benefit of heightened market volatility as clients shift portfolios. The bank is set to report fourth quarter and full-year results on Feb. 4.
–With assistance from Myriam Balezou.
(Updates with interview attribution)
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