UBS’s Ermotti Faults Swiss Regulators in Fight Against New Rules

(Bloomberg) — UBS Group AG Chief Executive Officer Sergio Ermotti is pointing his finger at the role of regulators in Credit Suisse’s downfall, as he intensifies a campaign against government plans to impose painful new rules on the company he leads.

Several weeks after the Swiss government’s shock announcement that it would require the bank to hold as much as $25 billion in additional capital, Ermotti is increasingly highlighting the perceived shortcomings of those responsible for the smaller rival before it imploded last year.

“The current regulation was not consistently applied for Credit Suisse and that has to be discussed,” Ermotti said at an event in Lucerne on May 23. “It must not be simply wiped away, only to talk about having more regulation.”

Having been hailed as a savior when it stepped in last year, UBS is now battling in the court of Swiss public opinion. It’s sometimes being cast as a giant bank that could wreck the country if it ever were to go under, causing supervisors to look for new ways to make sure that never happens.

For UBS, however, those solutions could be costly. With billions of dollars in new capital requirements up for discussion, analysts have said that the outcome of the government and parliamentary reviews could even affect the lender’s ability to return funds to its shareholders. 

Ermotti has said the bank’s capital distribution plans remain unchanged while also saying it’s “premature” to speculate about the potential impact of the Swiss capital proposals.

Ermotti has also said he agrees with most of the government’s reform plans including the effort to beef up the powers of Finma, the financial regulator. But the spat on capital has injected tension into what’s normally a highly consensual set-up. 

His references to the failures amid Swiss banking supervision — which includes Finma and the Swiss National Bank and, in a broader sense, the Finance Ministry — now pit him against those actors in the debate that will ensue in the coming months. 

Finma’s new head, Stefan Walter, has already made clear that UBS can’t expect any leniency from him. “The Credit Suisse crisis starkly illustrated the vulnerability of the parent banks,” he said on May 14.

The argument that Credit Suisse was poorly regulated helps Ermotti in making the claim that a rush to regulate more isn’t wise when even the previous regime wasn’t followed properly. 

The bank is also contending that the extra capital requirements would place it at a disadvantage in its domestic market, which other lenders like publicly-owned Zuercher Kantonalbank won’t face. UBS is now the only globally systemic bank left in the country. 

Representatives for UBS, the Finance Ministry and Finma declined to comment. 

The debate centers around the amount of funds that the parent bank has to hold against its foreign subsidiaries. In the case of Credit Suisse, the regulators argue that low capital backing for foreign units left the parent bank less able to absorb losses when stress arose.

Finma’s Walter is pushing for the government to ordain a 100% capital backing, up from around 60% currently. That could mean between $15 billion to $25 billion in extra capital for UBS, on top of an existing requirement to add about $20 billion due to the effects of the takeover including a larger balance sheet. 

While other reforms, such as handing Finma greater powers to intervene early when it spots trouble at a bank, will go through a longer parliamentary process, the capital issue can be made by ordinance. That leaves UBS with fewer levers to pull. 

The process will take until next year, with adoption by 2026, the government said last month. Before the new rules will be adopted, there will be a consultation period during which UBS and other stakeholders can officially comment on the issue.

While the government could still be “softened up,” according to political analyst and head of pollster Sotomo, Michael Herrmann, the desire among the public for regulation has grown. 

“UBS can no longer threaten at will,” he said. “The banks are not going to regain the status that they once had in Switzerland.”

©2024 Bloomberg L.P.