UBS Plans to Challenge Increased Capital Requirements Following Parliamentary Vote

The Swiss parliament's upper house voted 29 to 16 in favor of an amendment to a regulatory reform bill. This amendment requires UBS to back its foreign operations with high-quality equity capital amounting to up to 90% of their value, translating to an estimated additional $16 billion in Common Equity Tier 1 (CET1) capital for its domestic unit.

This revision is a slight adjustment from the original mandate of 100% backing and represents a partial victory for Swiss Finance Minister Karin Keller-Sutter. She has been advocating for two years to ensure that UBS can safely divest its international branches during crises. UBS leadership, including CEO Sergio Ermotti and Chairman Colm Kelleher, had favored a plan that relied more on convertible Additional Tier 1 (AT1) debt to achieve similar goals.

UBS criticized the new political outcome as lacking compromise and failing to address the underlying issues that led to Credit Suisse's collapse. The bank stated it would prioritize its long-term interests as the legislative process advances.

The amended bill now moves to Switzerland's lower house, which leans more to the left. This parliamentary discussion is not expected to conclude before 2027, and the results could potentially be subjected to a public vote.

The discussion surrounding UBS and its capital requirements arises during a time when Switzerland has been striving to stabilize its financial sector post-Credit Suisse's downfall in 2023. Government strategy has increasingly focused on raising the equity capital of its largest bank. UBS executives contend that these measures could hinder their global competitiveness.

UBS's stock remained relatively stable in Zurich. However, uncertainties regarding the heightened capital demands—which limit a bank's capability to distribute returns to shareholders and bonuses—have negatively impacted its share price over recent years. Despite a 10% increase in its stock this year, this remains below the more than 20% rise seen among its European counterparts.

Following the decision against the AT1 proposal, existing UBS bonds increased in value, with prices rising by 0.3 cents to 98.36 cents as observed by Bloomberg.

In her pre-vote address, Keller-Sutter thoroughly refuted arguments provided by UBS and its parliamentary allies. Ultimately, lawmakers favored a proposal closer to her initial suggestions than to UBS’s preferences.

Keller-Sutter noted that UBS has the necessary funds for capital strengthening, emphasizing the choice between bolstering the Swiss parent bank and issuing dividends or stock buybacks for shareholders.

The original government plan of requiring 100% capital backing was deemed the most burdensome for UBS, while the use of AT1 debt was viewed as less costly, despite also entailing an increase in regulatory requirements.

Currently, Swiss banking regulations mandate only 60% backing for foreign entities, with a quarter accessible through AT1 bonds. The government argued that this framework proved inadequate during the Credit Suisse crisis four years ago.

UBS leaders have voiced their discouragement regarding the government's efforts to impose higher capital standards following its acquisition of Credit Suisse in early 2023, which was orchestrated by the government amid financial distress.

Keller-Sutter has asserted that her proposals aim to ensure UBS's robustness during potential crises, rejecting the idea that AT1 bonds could serve as substitutes for CET1 capital due to concerns about their reliability in turbulent times.

The proposed changes will proceed to the lower house for further consideration, potentially leading to additional debates at year-end. If discrepancies arise between the two legislative bodies, they will negotiate amendments to find a common consensus.

A final decision on UBS’s capital requirements is not expected before 2027, and the outcome may also be subject to a public vote,

Potential scenarios for UBS as this process unfolds could range from significant actions, such as a merger with a non-Swiss bank to evade new regulations, to more modest adjustments aimed at managing capital cautiously over the coming years.