UBS Set for Long-Awaited Clarity on Switzerland’s Capital Rules

(Bloomberg) — UBS Group AG is finally about to find out just how many billions of dollars Switzerland will strip from its capital buffers.

The government this week is set to unveil an executive order, or ordinance, that decides which assets UBS will have to eliminate from its tally of regulatory capital. It will also present a draft for the second cornerstone of its planned banking rules overhaul — a law to determine how much in additional capital UBS needs to hold at home against activities abroad.

It will be a milestone for both the country and its largest bank. Switzerland is seeking to build a bulwark against future financial crashes after staring into the abyss during the Credit Suisse demise three years ago.

For UBS, higher capital requirements will constrain its strategy by curtailing its ability to grow internationally and to make investor payouts. That’s made the planned measures an overriding concern for Chief Executive Officer Sergio Ermotti and Chairman Colm Kelleher.

The government, or Federal Council, has proposed removing software and deferred tax assets from so-called CET1 capital. UBS estimates the step would reduce its metric by roughly $11 billion.

Bern also wants to see the lender back up its foreign units with 100% CET1 capital. That would lead to a fresh need of about $20 billion at the domestic entity UBS AG, according to the bank’s latest projections.

UBS had $71 billion in CET1 capital at the end of last year.

People familiar with the government’s thinking said earlier this year that the Federal Council will likely end up presenting a softened version of the ordinance, which would provide some relief to UBS. But they also said the government intends to keep the draft law on foreign subsidiaries as previously outlined, meaning it will probably submit a bill to parliament proposing full capital backing.

Theoretical options to soften the ordinance include allowing certain types of tax assets to continue counting toward regulatory capital, Bank of America analysts have said. Other possibilities would be to remove software only gradually or to phase in the new rules themselves over several years.

While the ordinance can be decided by the Federal Council alone, the foreign units law needs parliamentary approval. That process will take at least until next year and it introduces the possibility of substantial changes, with lawmakers set to hold the first closed-doors debate on May 4.

UBS has lobbied intensively against the proposals, and commissioned a study carried out by economic research firm BAK that was published last week. It projected a hit to the country’s gross domestic product of 11 billion to 34 billion francs ($14 billion to $44 billion) over a decade if the reforms go through as drafted.

The Swiss government, led on the topic by Finance Minister Karin Keller-Sutter, has dismissed UBS’s objections as exaggerated, while a number of business representatives and other politicians have called for the proposals to be softened.

The country’s strongest party — the Swiss People’s Party, or SVP — has also criticized the bill as too harsh, though some parties on the left are advocating for even stricter measures.

A decision by the government to soften the ordinance would likely increase the SVP’s willingness to seek fewer changes, if any, to the foreign units bill once it’s going through parliament, Thomas Matter, an influential delegate of the party, indicated last week.

A group of center-right lawmakers including Matter presented a compromise proposal in December that would allow UBS to use so-called AT1 capital to partially meet the foreign units requirement, which would impose lower costs on shareholders than CET1 capital. Keller-Sutter has rejected the plan.

The ordinance and the draft bill are part of a sweeping overhaul of financial rules that Switzerland initiated after the near-collapse of Credit Suisse in early 2023. The government at the time engineered the takeover of the bank by UBS, preventing what otherwise may have spiraled into a full-blown financial crash.

The increased size of UBS following the deal means any crisis of the bank would be even harder to resolve for Switzerland.

The Bank of America analysts predicted last month that the government will present a softened ordinance but leave the draft bill as previously proposed. They also said it’s likely the bill will subsequently get watered down by parliament.

The existing ordinance proposal would fully exclude software and DTAs from CET1 capital. It would also provide for a very conservative approach to so-called prudential value adjustments, which would result in lower capital levels as well.

CET1 capital, or common equity tier 1 capital, is considered to be a bank’s highest quality and the first to get depleted when losses occur. It’s compared against assets weighted for their perceived riskiness, yielding the CET1 ratio, which is the most-watched regulatory metric in banking as it sets limits for a bank’s ability to make investor payouts.

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