UBS to Get More Capital Reform Clarity When Swiss Lawmakers Meet

(Bloomberg) — UBS Group AG will find out this week the extent to which a key group of lawmakers will back a dilution of the government’s proposals on capital reform.

The Economic Affairs and Taxation Committee of the upper house in Bern is scheduled to discuss a number of changes to a draft bill to overhaul capital regulations on Tuesday, with all items so far indicating a relaxing of the original text.

Options range from simply reducing the amount of extra capital that UBS will need to find, to a plan that gives the bank the ability to fill as much as half of the requirement with bonds instead of equity.

The committee’s recommendation will be the first official response by lawmakers to the government’s plan, which emerged in the aftermath of Credit Suisse’s collapse over three years ago. It’s only one step in a lengthy legislative process that’s not expected to conclude before next year.

The finance ministry has proposed making UBS hold the full book value of its foreign units in equity capital at home, a measure that the bank has lobbied strongly against since it was first floated in 2024. The measure would mean UBS needs to operate with about $20 billion more of the highest quality equity capital, or CET1.

The panel is debating reducing the prescribed CET1 backing of foreign units to 80% or 75%, or linking it to the size of UBS’s foreign operations.

Majorities among lawmakers are unclear. While it looks likely that the government’s proposal will be watered down, there’s also broad consensus on the committee that capital requirements should rise from their current level. If lawmakers disagree, it’s also possible that they postpone their decision to the next committee meeting on Aug. 31.

The government has pushed for the full deduction of the book value of its units outside of Switzerland so that parts of the business can be more easily sold or wound down in case of a crisis. The discrepancy was identified as a factor behind the collapse of Credit Suisse.

UBS has pushed back strongly against the “extreme” reforms, arguing that the changes would weaken its competitive position and damage the Swiss economy. Reinforced by concerns that UBS could eventually leave Switzerland, the bank’s position has gained some sympathy among lawmakers.

UBS supporters in parliament, broadly from the center-right, are focusing on an alternative proposal which allows the bank to use so-called AT1 bonds to make up as much as half of the capital backing requirement for its foreign units. The advantage for UBS is that this form of funding can be cheaper than equity capital, though its application in crisis periods is uncertain.

To make this idea — which has been rejected by the government — palatable to a wider group of lawmakers, the proposal has been amended to install safeguards intended to strengthen the loss-absorbing abilities of the bonds, according to people familiar with the matter.

That includes banning coupon payments on the bonds and payouts to shareholders if the bank’s capital ratio drops below a certain level, addressing a problem which arose during Credit Suisse’s demise.

Separately, the idea of forcing UBS to postpone bonus payments in such a situation has also been floated in the committee, people familiar with the discussion said.

Investors in AT1 debt are wary of the Swiss proposal, both on the basis that it would generate more issuance and that changes to bond terms would complicate payments to holders. UBS is already one of the world’s largest issuers of the debt.

Some lawmakers have also proposed pegging UBS’s capital requirements to the size of its foreign businesses compared to the Swiss economy.

First Step

The government’s capital proposals have prompted a public standoff with the bank, which is significant given Switzerland’s usually consensus-based political culture.

UBS’s forceful lobbying included publicly attacking the annual financial stability report of Switzerland’s central bank as “misleading.” In it, the Swiss National Bank said the lender already has sufficient capital to meet the envisioned requirements; UBS called that a distortion of the regulation’s true operational impact.

With its decision, the committee will formulate a recommendation to parliament’s upper house on what changes, if any, should be made to the government’s bill. Informed by this, the body — formally known as Council of States — will vote on it, potentially during the autumn session next month.

The bill would then pass to the lower house, where lawmakers would take their own position. UBS might face more resistance there, as that chamber features more delegates from left parties than the upper house.

The measure becomes law only after both chambers agree. It could then still be challenged in a referendum under Switzerland’s direct-democracy system.

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