UBS Says AT1 Plan Is ‘Way to Go’ Ahead of Key Wednesday Vote
(Bloomberg) — UBS Group AG and a group of lobby organizations called on lawmakers to adopt the least costly option for new capital requirements, setting the stage for a key parliamentary vote on Wednesday.
UBS said in a position paper published late Monday that a motion to let it use AT1 bonds to meet as much as half of the new capital requirements along with reforms “is internationally aligned and reflects established market practice.” UBS Chief Executive Officer Sergio Ermotti added Tuesday that the plan is the “way to go” and a balanced outcome.
Earlier on Monday, a group of influential lobby organizations published a Sept. 18 letter to lawmakers in which they called for “balanced” banking regulation — amid concerns that Switzerland’s competitiveness will be damaged by overly-strict capital requirements for its largest lender. While the debate about how to respond to the Credit Suisse crisis has been going on since 2023, UBS’s stance now signals it sees the chance for a durable compromise.
The upper house of Switzerland’s parliament is set to vote on three proposals on Wednesday. Led by Finance Minister Karin Keller-Sutter, the government wants UBS to back foreign units with 100% of CET1 capital, while one group of lawmakers wants to allow the bank to meet as much as half of the new requirements with AT1 bonds. Another group wants to increase the CET1 backing to 90%.
Keller-Sutter has previously rejected the AT1 approach, dismissing it as “a solution in favor of the bank and against taxpayers.”
While the upper house’s vote is an important milestone, lawmakers in the lower house still have to have their say. That chamber is more left-leaning and less likely to be sympathetic to UBS.
Ermotti and Chairman Colm Kelleher have said that the AT1 proposal would be “bearable” for the bank while dismissing the alternatives on the table. The compromise rests on AT1 debt being a less expensive way to raise capital than pure shareholder equity — but it’s also less certain as a means of absorbing losses in a crisis situation. The proposal is also still more costly for UBS than the status quo.
“Are we happy about it? No, we are not,” Ermotti said in an NZZ interview published Sunday, referring to the AT1 proposal. “We helped save Switzerland from a reputation-damaging debacle during the Credit Suisse rescue,” Ermotti also said.
UBS agreed to buy the rival in early 2023 through an emergency deal engineered by the Swiss government, which was concerned that the large bank’s troubles could spiral into a full-blown financial crisis.
AT1 bonds are a form of debt and carry annual coupons that are typically higher than those on more senior types of fixed-income securities. The Swiss lawmakers are also discussing tweaks to the securities to ensure they can help stabilize a bank earlier in a crisis.
CET1 capital tends to be seen as having a higher cost of capital than AT1 bonds, partly because equity investors typically expect bigger returns than fixed-income investors. A larger amount of CET1 capital can also erode profitability metrics as many of them compare profit to the amount of equity capital used to achieve it.
–With assistance from Steven Arons.
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