Debate intensifies over UBS’s capital requirements as the Federal Council considers increasing equity backing for foreign investments to 100%, potentially burdening the bank with an estimated 15 to 25 billion dollars in additional capital needs. While UBS argues that current requirements are sufficient, officials warn that stricter rules could harm its competitiveness and profitability. The outcome of these discussions may significantly impact UBS’s operations and its ability to maintain investor confidence amidst evolving regulatory pressures.
Intensifying Debate Over UBS Capital Requirements
The discussion surrounding UBS is heating up, particularly regarding the future capital requirements for this major banking institution. Following the parliamentary inquiry committee’s findings on Credit Suisse’s collapse, the focus now shifts to the Federal Council. In their April 2024 report on banking stability, they indicated a review of heightened capital requirements for Switzerland’s sole remaining major bank as part of a broader strategy to address the fallout from the CS crisis.
Balancing Security and Competitiveness
For both politicians and regulatory authorities, ensuring UBS’s stability in the future is paramount, particularly regarding its ability to navigate crises effectively. The Federal Council is advocating for systemically important banks to maintain increased equity for their international investments, allowing for easier separation and sale of these assets in times of trouble. While this approach seems logical, it presents a challenging balance between protecting Swiss taxpayers and maintaining UBS’s global competitiveness.
Currently, systemically important banks are required to secure foreign subsidiaries with approximately 60 percent capital. However, the Federal Council is considering a shift to requiring UBS to back these investments with 100 percent equity, which would significantly increase the financial burden on the bank. Finance Minister Karin Keller-Sutter has estimated that UBS could face additional capital needs ranging from 15 to 25 billion dollars, in addition to the capital already required for regulatory compliance.
Under the existing “Too big to fail” regulations, UBS must build capital reserves, especially after its market share grew due to the acquisition of Credit Suisse. Finma has allowed UBS a grace period until 2030 to comply. Furthermore, the new “Basel III final” regulations have been in place in Switzerland since the start of the year, further complicating UBS’s capital requirements. Analyst Andreas Venditti from Vontobel notes that these two regulatory changes alone could increase UBS’s capital needs by 19 billion dollars, not including any additional requirements from the Federal Council.
Since the release of the Federal Council’s report, Keller-Sutter has not elaborated on further demands for UBS, and it seems the dialogue between her and UBS has stalled. Sources indicate that UBS feels sidelined in these discussions, creating tensions within the bank’s leadership. The Finance Department has declined to comment on its interactions with UBS.
As the State Secretariat for International Financial Matters (SIF) works on updating equity capital regulations, the Federal Council aims to present a consultation draft in May. There are concerns among left-wing politicians that lobbying from the banking sector could dilute potential regulatory changes.
Despite the uncertainty, UBS appears to be facing a significant tightening of capital requirements, as suggested by various officials. Stefan Walter, head of Finma, has called for full capitalization of UBS’s foreign subsidiaries, a proposal that bank CEO Sergio Ermotti has vigorously opposed. He warns that increased capital requirements would drive up banking service costs and diminish UBS’s competitiveness in the global market, asserting that the bank is being penalized for its role in the Credit Suisse merger.
UBS maintains that its current capital requirements are adequate, noting that it already meets the highest minimum capital standards for globally systemically important banks. An increase would not only hinder UBS’s competitiveness but also negatively impact lending conditions for Swiss businesses and households.
At an industry event in Zurich, Ermotti labeled the push for total backing of overseas investments as “completely excessive,” arguing that punishing the bank for its international operations is illogical. He criticized the narrative surrounding capital adequacy as a form of “propaganda” driven by academia and media, which tends to emphasize risks without acknowledging the broader context.
SVP National Councilor Thomas Matter has echoed concerns about UBS’s international competitiveness being jeopardized by mandatory full backing of foreign investments. He believes such requirements could lead UBS to relocate its headquarters outside Switzerland. Matter suggests that the backing requirements should vary based on the type of business conducted abroad, advocating for lower requirements for less risky operations like asset management.
As the equity capital regulation evolves, UBS’s apprehension about potentially severe constraints grows. Stricter capital rules could fundamentally alter the bank’s risk profile, profitability, organizational structure, and market appeal, according to UBS’s perspective. Current investor confidence is reflected in the bank’s stock performance, which surged after the Credit Suisse acquisition but has since plateaued. Analyst Johann Scholtz from Morningstar identifies the unresolved capital issue as the primary risk facing UBS shares. High capital mandates could impede UBS’s ability to execute stock buybacks or pay dividends, significantly impacting its stock value.
While UBS currently boasts a robust capital foundation compared to European rivals, increased capital demands would make it the best-capitalized bank overall. However, Scholtz warns that regulators often overlook crucial factors such as business models, liquidity, and corporate culture when evaluating capital sufficiency, as demonstrated by the Credit Suisse situation.
Analysts are actively assessing the potential consequences of stricter capital regulations. Michael Klien from ZKB believes UBS will be required to fully capitalize its foreign subsidiaries at the parent company level. Nevertheless, he assures that there is no cause for alarm, as UBS is well-equipped to meet these additional demands over time without the need for external capital raises. Reports suggest that UBS has significant capital tied up in former Credit Suisse assets, indicating that they have resources available to manage any new capital requirements.
The implications of tighter equity rules remain challenging to predict. Should UBS be obligated to increase capital backing for foreign investments, the bank may need to reevaluate its operations and decide which business activities to pursue and how to account for them. If the Federal Council chooses to impose maximum additional requirements of 25 billion dollars, UBS would face the daunting challenge of increasing its hard equity by approximately one-third, potentially necessitating drastic measures such as reducing its loan portfolio and ceasing certain services to maintain competitiveness.