UBS global units must be backed by ‘hard capital’: SNB

UBS is challenging Swiss too big to fail proposals Keystone / Gaetan Bally

Swiss banking giant UBS should be required to fully back its units abroad with highest-quality equity capital in Switzerland, a senior central bank official reiterated.

At a time when lawmakers are discussing potentially watering down such a requirement, Swiss National Bank (SNB) vice-president Antoine Martin said that the government’s tougher proposal on the matter remains optimal.

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“Measures proposed by the Federal Council, in particular the full backing of foreign participations with ‘hard capital’ (Common Equity Tier 1 or CET1 capital), would make the Swiss financial market more resilient,” he said in a speech on Wednesday.

The SNB’s intervention signals that officials are against the broad outlines of a compromise proposal being discussed in a key committee of the Swiss Senate.

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In that proposal, UBS would be allowed to meet as much as half of the government’s requirement using less high-quality capital, a form of debt known as AT1 bonds. While that would be a less expensive way to hold more capital, the debt is less certain as a means of absorbing losses in a crisis. The committee is expected to issue its stance on the proposals on Monday.

UBS itself says that plan is “extreme,” arguing it would make the bank uncompetitive. Lawmakers are debating alternative new requirements that would allow the lender to partially deploy convertible debt in the form of so-called AT1 bonds.

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In a discussion after his speech, Martin argued that higher capital requirements don’t necessarily mean that a bank becomes less profitable.

“There’s not the relationship between the capital backing of a bank and its competitivity that you might expect,” he said. “Some of the most profitable banks in the US have the highest capital.”

Martin, who leads the financial stability department of the Swiss central bank, spoke at an evening event for interested members of the public in Basel.

A footnote in his speech highlighted that the SNB also welcomes the introduction of a public liquidity backstop in the government plan, as well as setting a quantitative minimum requirement on central-bank eligible collateral for systemically important banks.

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