UBS Left Reeling as Swiss Finance Chief Wins Over Lawmakers

(Bloomberg) — It’s just gone half-time in Switzerland’s long contest between UBS Group AG and the government over capital, and the finance minister is in the lead.

On Wednesday the upper house of parliament, or Council of States, backed a plan that broadly hews to what Karin Keller-Sutter has fought for over the past two years: forcing the nation’s largest bank to substantially increase the amount of equity capital it holds at home.

The interim result was engineered with a mix of forceful parliamentary rhetoric, tactical moves and a delay that gave her an extra week to regroup after UBS looked to be gaining the upper hand.

The next round moves to the lower house of parliament where the plan could yet be watered down, and a decision is unlikely before next year. Yet the Council of States’ surprising backing of her position may presage similar support in the more left-leaning lower house. Despite being a member of the pro-business FDP, Keller-Sutter’s main backers on the UBS file come from left-of-center parties.

The stakes are high. UBS says the capital reform would translate into an extra requirement of some $16 billion in CET1 capital and render it uncompetitive against global peers. The firm heavily criticized the decision by the upper house and pledged to continue its fight against the planned measure.

UBS shares were down as much as 2.8% in Thursday trading, and have trailed peers this year.

The dispute centers on how much capital UBS should hold against its foreign subsidiaries — a complex matter which many lawmakers struggled to master.

On Wednesday, Keller-Sutter, 62, addressed lawmakers just before the vote in the Council of States’ towering, neo-renaissance chamber in Bern. The trained interpreter broke down the technical debate into a vote for or against safeguarding the public finances.

“The question at hand is basically quite simple,” she said. “Who has to bear the risks that a major bank takes abroad? Is it the owners of the bank, the shareholders? Or also the taxpayers in Switzerland?”

During her roughly 45-minute speech, Keller-Sutter displayed a grasp of technical details — including the observation that UBS’s CET1 ratio would still be lower than its peer Morgan Stanley under the new rules.

Speaking in a measured tone, she took on the key counterarguments against her proposals one by one, and tackled the argument that higher capital demands would have a knock on effect on financing costs for the Swiss economy along the way.

Until recently, UBS appeared to be in the ascendant. A key parliamentary committee on Aug. 31 backed a solution that would be substantially cheaper for the bank than the finance minister’s proposal, involving heavy use of convertible AT1 bonds. The bank had put some effort into nudging lawmakers into that direction, always arguing that the government plan would disadvantage the Swiss financial center.

After initially criticizing even that plan, UBS and supportive lobby groups threw their weight behind it in recent days, with Chief Executive Officer Sergio Ermotti calling the proposal the “way to go.”

But Keller-Sutter gained an unexpected opening when the debate in the upper house last week ran beyond its allotted time after far more lawmakers than anticipated wanted to speak. The vote had to be postponed, handing the finance minister several extra days to reassess the chamber.

The debate had shown that a meaningful group of lawmakers was uncomfortable with both extremes on the table: backing 100% of the foreign units with the best-quality equity capital, or the version that allowed half of the new requirement to be met with AT1 debt.

Those lawmakers’ preferred landing point was 90% CET1 backing, according to what they said in the debate last week. So, Keller-Sutter adapted her tactics.

The night before the vote, she pointedly played down the distance between the compromise and the government’s line.

“90% is close to the Federal Council,” she told a public event in Zurich on Tuesday, speaking directly after Ermotti. “You don’t need much math for that.”

Appealing to the nation’s collective memory of two previous banking crises including the bailout of UBS back in 2008, Keller-Sutter cited Credit Suisse’s inability to sell foreign units to free up capital as a key reason for its collapse, arguing that inadequate capital backing constrained the bank’s options.

While she acknowledged that the government’s proposed rules to remedy this shortfall would be expensive for UBS, she said the status quo was unacceptable. The bank “benefits from a de facto state guarantee, that is, from a taxpayer subsidy,” she said. “If you cut this subsidy, then of course it costs something.”

In the end, the chamber narrowly rejected the government’s 100% proposal. But in the decisive contest between the remaining alternatives, lawmakers backed the 90% CET1 option over the UBS-supported AT1 plan — even by a comfortable margin of 29 votes to 16.

The government also had support from officials at the Swiss National Bank, who said Thursday the outcome was “a good amount” —- if not the 100% they’d also backed.

In the long face-off between the global financial titan and Switzerland’s apparatus of state, there have been opportunities for Keller-Sutter to soften her stance and heed the chorus of business leaders, lobbyists and center to right-wing politicians calling for an easier ride for the bank.

The politician is also in need of a success story after what many saw as her bungling of a phone-call with US President Donald Trump last year that resulted in a painful hike in tariffs on Switzerland.

In an interview with Bloomberg in 2024, Keller-Sutter channeled former UK Prime Minister Margaret Thatcher’s famous ‘this lady’s not for turning’ quote.

“What she said is that she was able and convinced to try and stick to her convictions and decisions,” she said. “I think this is important.”

Lower House

Attention now turns to passage of the bill through the lower house. There, Keller-Sutter’s chances of being able to steer the outcome look as good as in the upper chamber.

The right-wing Swiss People’s Party (SVP), who has the largest group of lawmakers in the house, appears less eager to spend substantial political capital supporting UBS’s cause.

A senior party leader who requested anonymity discussing internal deliberations, described capital rules as a secondary issue for a party which had its biggest political successes on immigration.

Wednesday’s vote was evidence that UBS has misjudged the political mood, according to Georg Lutz, professor of Swiss politics at the University of Lausanne.

“This outcome is the result of Keller-Sutter steadfastly and consistently sticking to a stance she took from the very beginning,” said Georg Lutz, a professor for Swiss politics at the University of Lausanne. For lawmakers, “UBS’s arguments simply lacked credibility,” he said.

–With assistance from Thomas Hall.

(Updates with shares, SNB comment)

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