Exclusive: Switzerland and UBS could compromise on capital rules, sources say
News Summary
Switzerland and UBS are privately signaling a willingness to compromise on new capital rules, potentially allowing parliament to settle on lower requirements acceptable to both the government and the bank, sources say. UBS has strongly criticized the government's initial proposal, unveiled after the 2023 Credit Suisse collapse, which would require an additional $24 billion in capital. UBS argues this would disadvantage it against global rivals and is considering relocating its headquarters abroad. Sources suggest Bern might accept rules lowering the additional capital burden to around $15 billion, an amount UBS could tolerate. Potential compromise routes include reducing the capitalization requirement for UBS's foreign subsidiaries from 100% to 80% and allowing the use of Additional Tier 1 (AT1) debt instead of Common Equity Tier 1 (CET1) capital for part of the burden. However, the process is still lengthy, with final capital requirements not expected to be clear until next year.
Background
Following the 2023 collapse of Credit Suisse, the Swiss government proposed new capital rules aimed at making the country's banks safer and preventing future crises. As UBS acquired Credit Suisse, it stands as Switzerland's sole global systematically important bank, directly impacted by these proposed regulations. UBS has been under pressure from investors regarding its capital position and profitability, with its shares lagging peers this year despite recent rallies. The challenge for UBS is to meet regulatory demands while maintaining global competitiveness and effectively integrating Credit Suisse's operations.
In-Depth AI Insights
What are the underlying strategic motivations for both the Swiss government and UBS in seeking this compromise, beyond the stated reasons of stability and competitiveness? - The Swiss government needs to demonstrate action on financial stability post-Credit Suisse but fears over-regulating its sole global bank, potentially harming Switzerland's standing as a financial hub. This represents a national strategic balancing act. - UBS faces immense challenges integrating Credit Suisse, and excessive capital rules would hinder synergy realization and global ambitions. The threat of relocating headquarters is a potent bargaining chip, aimed at preserving its global competitive edge and expansion potential. How might this capital rules compromise influence the future structure and competitive landscape of the global financial industry, particularly for other Systemically Important Financial Institutions (G-SIFIs)? - It sets a precedent for regulatory flexibility in balancing financial stability and bank competitiveness, potentially emboldening other G-SIFIs to push back on stringent post-crisis capital requirements in their home jurisdictions. - If Switzerland successfully navigates a path that ensures stability without sacrificing competitiveness, it could exacerbate a trend of "regulatory arbitrage," where banks might seek domiciles more favorable to capital efficiency, thereby challenging the uniformity of global financial regulation. What are the long-term investment implications for UBS and the broader Swiss banking sector if this compromise is reached, and what key metrics should investors monitor? - For UBS, lower capital requirements imply a higher Return on Equity (ROE) and Return on Tangible Equity (ROTE), which is positive for profitability. It would enhance UBS's competitive standing against global peers and potentially free up capital for shareholder returns (e.g., share buybacks and dividends). - Investors should closely monitor UBS's Common Equity Tier 1 (CET1) ratio, any plans for Additional Tier 1 (AT1) issuance, key profitability metrics, and its share price performance relative to global peers. For the broader Swiss banking sector, observe if other banks leverage UBS's precedent for regulatory adjustments and if this elevates overall industry valuations.