UBS Compromise Plan Gets Backing of Largest Swiss Party

(Bloomberg) — The largest party in Switzerland’s parliament backed a compromise proposal in the ongoing debate over UBS Group AG’s capital requirements, bringing the prospect of a deal to defuse the standoff a step closer.

In a consultation document seen by Bloomberg News, the Swiss People’s Party, SVP, said it supported a proposal circulated in December by a cross-party group of lawmakers, in which UBS could use convertible bonds known as AT1s to meet some of the new capital requirements. The suggestion — which sent UBS stock to a 17-year high — would substantially cut the need for new equity capital that the bank is facing.

UBS took over its ailing rival, Credit Suisse, in 2023, but soon found itself facing capital requirements as much as $26 billion higher on account of its new size and complexity. The bank has fought back against the government’s proposals, and has won some lawmakers to its cause. Support by the SVP, which holds about a third of seats in the lower house, increases the chances of the final regulation being more favorable to UBS.

UBS has strongly criticized the government’s stance, arguing it will make the bank internationally uncompetitive. Shares rose on Wednesday after the report was published, and were broadly unchanged on the day at 12:56 p.m. in Zurich on Thursday.

A spokesperson for UBS declined to comment.

The liberal party FDP — to which Finance Minister Karin Keller-Sutter belongs — also signaled openness to the compromise in its consultation entry, but chose vaguer language. It should be “examined” whether the full backing of foreign units “can be supplemented by suitable instruments that could be converted into equity capital in the event of a crisis,” the group said in the document seen by Bloomberg.

The FDP’s more guarded approach suggests that the party’s leadership wants to take a stance more favorable to UBS without publicly clashing with Keller-Sutter, who has stood behind the toughest approach on capital. In Switzerland’s consensus-based government, or Federal Council, it’s not unusual that ministers’ positions diverge from their parties’ stances.

Both parties’ documents are part of a process in which stakeholders can comment on the government’s proposals, which is due to end on Friday. It is not certain that all lawmakers will follow their party’s line.

If the compromise solution gains broad backing, it could dispel a major source of uncertainty that’s hung over the bank since last year, depressing the share price and calling future investor payouts into question. The lender’s opposition has raised the prospect that the bank could relocate its headquarters out of the country.

What Bloomberg Intelligence Says:

A call from the Swiss People’s Party’s (SVP) to ease a suggested hike in UBS’s capital requirement (as reported by Bloomberg News) reinforces our conviction that a compromise can be reached, after the government proposal of a huge $26 billion capital hike. Still, further capital buildup will likely be needed, moving the lender’s requirement well above that of global peers, and threatens consensus for $21 billion shareholder payouts in 2026-28.

— Philip Richards, Senior Banks Analyst

The AT1 plan was proposed last month by a group of individual senior lawmakers from several center-right parties including the SVP and the FDP. AT1s are a cheaper form of capital than equity, and according to the compromise proposal, can be used for up to 50% of the extra amount required by the government’s demand that UBS fully back its foreign units at the parent bank.

Analysts at JPMorgan Chase & Co. have calculated that the compromise measure would cut UBS’s need for CET1, the highest-quality form of equity capital, to around $400 million. AT1s are debt issued by banks that can be converted to equity when certain conditions are met, and were broadly adopted as an additional way to create capital in the wake of the 2008 financial crisis.

The role of AT1s is not uncontroversial, given their uncertain role in bank emergencies. Credit Suisse saw its own stock of the bonds wiped out in the rescue by UBS in 2023, giving rise to multiple investor lawsuits. Global regulators have doubted the true loss-absorbing capacity of AT1s in the past also in more normal situations, as banks have been reluctant to impose losses on bondholders or convert them to equity as a stabilizing measure.

UBS AT1s have underperformed the risky bonds of all other European lenders over the past month, when the prospect of using those notes to meet extra capital requirements first emerged, based on data compiled by Bloomberg. Risk premiums among certain UBS bonds have also widened the most in Europe this week, when the bank raised $3 billion via a new sale.

Intangible Capital

The SVP also backed allowing UBS to continue counting certain items of so-called intangible capital including software and deferred tax assets as part of its regulatory tally. The party also supported a provision from the original lawmaker group that would require UBS to keep the size of its investment bank under 30% of the firm’s risk-weighted balance sheet.

Separately, the party also called in its consultation entry on the government to formally evaluate a proposal made last year to force UBS to dispose of its US units. That idea, which has played little role in the domestic debate so far, had been previously floated by former minister and influential party figure Christoph Blocher.

Switzerland’s finance ministry will collate all entries to the consultation procedure and provide the government with a recommendation on whether to change the draft of the bill it will present to parliament. If other consultation entries show broad-based support for the AT1 plan, the executive could incorporate it directly in that proposal.

The decision ultimately rests with lawmakers, any compromise could also be incorporated when the bill reaches parliament.

The government is set to present the final shape of the draft in the first half of this year with lawmakers expected to debate the bill in 2027. After their decision, the law can theoretically be challenged in a referendum.

–With assistance from Myriam Balezou and Tasos Vossos.

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