Swiss to issue capital rules for UBS that can alter bank’s future

[ZURICH] Switzerland is expected to flesh out stricter capital rules for UBS in April – a major step in determining the future of the banking giant that may influence whether it chooses to remain based in the country.

Ever since the 2023 collapse of Credit Suisse and its acquisition by UBS in a government-backed takeover, Switzerland has pledged to tighten rules for its only remaining global bank.

UBS said this could make it carry US$22 billion in extra capital.

In a draft law expected in April, the government is very likely to stick to its chief demand, deemed excessive by UBS, that the bank must fully back its foreign units with Common Equity Tier 1 (CET1) core capital, said lawmakers and bankers.

The government insists the overhaul is necessary for financial stability, citing the fact that UBS has a balance sheet about twice the size of the Swiss economy.

Parliament will be the final arbiter of the new capital rules and may water them down.

On measures under immediate government control, however, which determine the assets that count as core capital, the government is expected to offer concessions to the bank, lawmakers across the political spectrum said.

Without them, the bank will face a greater risk of becoming a takeover target.

It may need to revive contingency plans that include possibly moving its headquarters abroad, two sources told Reuters.

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UBS declined to comment.

David Benamou, chief investment officer of asset management company Axiom Alternative Investments, said: “With an additional capital layer, UBS cannot remain as attractive as other banks.”

He noted the way in which the debate about UBS capital caused its shares to underperform rivals.

Still, the bank’s departure from the country is seen as unlikely.

Hans Gersbach, economics professor at ETH Zurich, said: “Swissness will be an even greater asset in the future in this increasingly geopolitically risky world.”

Stability versus competitiveness

As UBS pushes back against the government’s capital proposals, a group of lawmakers has suggested a concession, which would allow the bank to count less expensive Additional Tier 1 capital towards its required buffer.

The government will also issue so-called ordinance measures, set to enter into force in 2027, on whether the bank can still count software and deferred tax assets towards its core capital.

The ruling Federal Council previously suggested UBS should fully deduct these assets, which the bank has said would eliminate around US$11 billion of its current capital.

Lawmakers, Switzerland’s regional governments and business groups have called for aligning the rules with other financial centres.

This could mean allowing UBS to write down software for three years, in line with European Union rules, lawmakers told Reuters.

Rules on deferred tax assets could also be adapted to international standards, though the exact form of any relief UBS may receive is unclear.

Roman Studer, chief executive officer of the Swiss Banking Association, said: “It’s hard to imagine the ordinance won’t be amended.”

Swiss-based investment company Vontobel analyst Andreas Venditti said in a March note to investors that UBS shares may come under pressure if the government enacts its original ordinance proposal without a phase-in period.

Erich Ettlin, a lawmaker for The Centre party, will chair the parliamentary committee that will start debating the UBS rules in early May.

He said he hoped the ordinance would include concessions.

“Otherwise, we would have to correct that retroactively through legislative action.” REUTERS