UBS shares rose by nearly 2% on Tuesday after reports indicated that Swiss parliamentarians are exploring a lower CET1 capital backing requirement for the bank's foreign subsidiaries than the government has proposed. The move under consideration could reduce the immediate capital burden facing UBS by several billions of dollars.
The government had proposed legislation that would require UBS to fully back its foreign units with 100% of Common Equity Tier 1 (CET1) capital. Under the draft put before parliament in April, adoption of that full 100% backing would force UBS to raise roughly $20 billion in additional CET1 capital.
Lawmakers are reportedly examining alternatives. Several people familiar with the internal deliberations said options under discussion include a CET1 backing level of about 70% to 80%. Analysts cited by those reporting on the talks estimated that an 80% requirement would cut the additional CET1 needed to approximately $15 billion. A 50% backing threshold, which was also raised during a parliamentary hearing last month, could allow the bank to retain its current core capital levels without seeking fresh equity.
The bank, which is Switzerland's only remaining global lender following its takeover of Credit Suisse after that lender's 2023 collapse, has publicly criticised the government's 100% proposal as excessive. Chief executive Sergio Ermotti warned last week that the regulatory overhaul was likely to leave the bank with at least a "black eye." The proposed rules are designed to tighten how UBS funds its overseas subsidiaries to reduce the risk of a repeat of the Credit Suisse situation.
Political dynamics are central to the outcome. The government's plans have weighed on UBS shares and contributed to tensions between the bank and Finance Minister Karin Keller-Sutter. The upper-house committee currently examining the banking bill is widely regarded as relatively sympathetic to UBS's argument that overly onerous regulation could harm both the bank and the broader Swiss economy. Nevertheless, when the legislation reaches a full parliamentary vote later this year, tougher positions are expected to be advanced, with centrist and moderate lawmakers likely to hold the balance.
There is also discussion among some legislators about whether Additional Tier 1 (AT1) capital could be used alongside CET1 in the overall funding framework to reduce costs for the bank. The government has signalled that it views AT1 instruments as carrying higher risk, but proposals being considered envisage differing mixes of AT1 and CET1 within the capital structure.
Sources involved in the talks also indicated that a fee UBS would pay for access to a planned public liquidity backstop - an emergency funding facility intended for major banks - could be linked to the level of capital backing required. Two of the sources plus a third person familiar with the matter described that potential linkage.
Observers close to the committee suggested a compromise could emerge from the upper house that settles on a CET1 backing requirement somewhere between 50% and 100%. Two sources said lawmakers are seeking a proposal capable of mustering broader parliamentary support, which could mean a mid-range requirement that eases the immediate capital call on UBS while still strengthening oversight of funding for foreign subsidiaries.
Market reaction to the reports was visible in the share price: the quoted trading snapshot showed UBS at 38.55, up 0.71 (1.88%) in real-time data. The potential for a reduced capital requirement appears to have alleviated some investor concern over a large equity raise in the near term, though final outcomes will depend on the legislative process and the positions adopted when the bill is debated and voted on later this year.
Implications and context
- The discussions reflect a balancing act between shoring up financial stability and preserving the competitiveness of Switzerland's banking sector.
- Any decision on CET1 backing, the potential inclusion of AT1 instruments, and the terms of a public liquidity backstop will directly affect UBS's balance-sheet planning and potential need to issue equity.
- Political alignment in parliamentary committees and votes will be decisive in determining the final regulatory burden placed on the bank.