UBS's stock declined following the Swiss Finance Minister Karin Keller-Sutter's dismissal of a legislative proposal that would have enabled the bank to count Additional Tier 1 (AT1) bonds towards half of the capital needed to support its international subsidiaries at the parent level. The Finance Minister emphasized the importance of solid core capital in crisis scenarios and voiced concerns over the financial implications and market instability potential of changing AT1 bond conditions. Swiss authorities nonetheless affirm UBS meets current capital standards.
Key Points
- Swiss Finance Minister rejects legislative proposal allowing UBS to use AT1 bonds for half the capital needed to back foreign units.
- Minister emphasizes the importance of hard core capital during early crisis stages and expresses concerns over conversion conditions of AT1 bonds.
- Swiss authorities confirm UBS's current capital reserves meet regulatory requirements.
UBS shares (SIX:UBSG) saw a 2% decrease on Friday as Swiss Finance Minister Karin Keller-Sutter rejected a recent legislative suggestion to permit the bank to include Additional Tier 1 (AT1) bonds in fulfilling regulatory capital requirements. The initial proposal would have allowed UBS to utilize AT1 bonds for up to 50% of the funding required to fully back its foreign operations at the parent company level.
Minister Keller-Sutter criticized this approach, indicating that it "does not resolve the underlying issue and offers minimal improvement to the existing circumstances." In a detailed discussion with the Swiss financial publication Finanz und Wirtschaft, she highlighted that during the early phases of a financial crisis, "only hard core capital is decisive." She outlined that the conditions for converting AT1 bonds into common equity are tied to specific criteria, which are unlikely to be met at the onset of crisis developments.
Furthermore, the Finance Minister cautioned that adjusting the terms of AT1 bonds to permit earlier conversion risks provoking higher interest demands from investors. This scenario would negate any cost advantage these instruments might have over traditional equity capital. She described such modifications as creating "an uncertain tool that would ultimately impose costs on the bank comparable to those of stable, hard core capital and, if implemented, could further destabilize financial markets."
Despite this dismissal of the proposal, authorities in Switzerland have reassured that UBS currently maintains adequate capital in line with prevailing regulatory requirements.
The debate underscores the ongoing scrutiny around bank capital structures and regulatory frameworks intended to maintain financial stability, especially relevant to the banking and financial services sectors.
Risks
- Potential market instability if AT1 bond conditions are altered leading to investor uncertainty affecting UBS and the banking sector.
- Increased cost for UBS if investors demand higher interest rates on modified AT1 bonds, impacting bank capital strategies.
- Uncertainty around regulatory capital adequacy if reliance on AT1 bonds is attempted, influencing market confidence in financial institutions.