UBS Already Has Enough Capital for Government Plan, SNB Says
(Bloomberg) — UBS Group AG already has enough capital to meet proposed new requirements in the reform pushed by the Swiss government, according to the Swiss National Bank.
In its annual financial stability review published Thursday, the central bank said that it continues to support the government in demanding a full capital backing of the bank’s foreign units. Given that UBS has capital reserves of $9 billion at its Swiss unit, it already has sufficient capital to meet the requirements of the proposed capital reform.
Taking into account the transition period “and the bank’s expected profits, UBS can be expected to be able to comply with the proposed capital measures, while continuing to distribute profits to its shareholders,” the SNB said.
UBS is awaiting Switzerland’s ultimate decision on its new capital requirements. In late April, the government watered down part of the reforms but refused to back down on its core demands. The core package is now being debated in parliament and the process is expected to last until next year.
The government wants to force UBS to raise the amount of common equity capital it holds domestically against its foreign operations to 100% of each unit’s equity value, from 60% at present. UBS estimates that this would require it to add about $20 billion in CET1 capital to its Swiss entity. The lender has said that the plan would severely damage its business model, and by extension hurt the domestic economy.
Lawmakers look set to reduce the government’s demands, but there’s also broad agreement that requirements should rise from their current levels. The committee responsible at the moment will meet again in August and could then formally propose easing.
The SNB, along with financial regulator Finma, has consistently supported the idea of full capital backing. The International Monetary Fund has also endorsed the approach.
“As highlighted during the crisis at Credit Suisse, risks associated with foreign participations are not adequately covered by the current regulatory capital regime,” the SNB said. “The Federal Council’s proposal addresses these risks in a targeted and proportionate manner.”
In the report, the SNB highlighted that UBS is special among Swiss banks in that it can face significant losses from both domestic and foreign exposure. Stress tests showed that “the loss potential for UBS under the various stress scenarios remains substantial,” the central bank said.
The bank would be hit hardest by a global recession scenario, followed by an asymmetric recession scenario, the SNB said. It also noted, though, that UBS and most Swiss domestic banks could probably handle the most likely situations.
“Overall, the Swiss banking sector is well placed to face the challenges presented by the current environment,” the central bank said. “The SNB’s stress tests for the domestically focused banks and UBS suggest that most banks could absorb the losses under relevant adverse scenarios.”
(Adds stress test comments from ninth paragraph.)
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