Swiss Regulators Forcing UBS to Increase Capital by USD 26 Billion

In an attempt to defray the risks of another Credit Suisse debacle, the government of Switzerland has proposed, much to UBS’s consternation and chagrin, that UBS increase their capital requirements by up to USD 26 Billion. The UBS management has already criticised this move by the FDF (Federal Department of Finance), but despite intensive public lobbying by the bank’s officials, the FDF wants UBS to fully capitalise its foreign subsidiaries. The UBS proposal by the FDF forms only part of the department’s on-going and wide-ranging reforms to the financial sector of Switzerland.

In 2023, UBS, backed by a state sponsored rescue, took over its biggest Swiss competitor Credit Suisse, and part of that rescue now requires UBS to match 60% of the capital at their overseas/ international subsidiaries with capital at their head office or parent bank. The reasoning behind this move by the FDF, is to avoid the likelihood of another state sponsored rescue, this time, of their largest bank, which means UBS has to increase its common equity tier 1 capital by USD 26 Billion. The FTF has also said that UBS can reduce its AT1 bond* holdings by USD 8 Billion leaving a net increase in Tier 1 capital of USD 18 Billion.

*AT1 Bond Holdings – refers to the investments an individual or institution holds in Additional Tier 1 Bonds also known as contingent convertible bonds or CoCos**. AT1 bonds are a type of bank capital designed to absorb losses during a bank’s financial distress, making them a higher risk, higher yield, compared to a bank’s traditional bond.

**CoCo Bonds – are hybrid debt instruments (combines characteristics of both debt and equity) that are automatically converted into equity or written down when a pre-specified trigger point is reached which is typically a fall in a bank’s capital ratio. This mechanism helps banks recapitalise without needing to seek external equity under stressful conditions, reducing the likelihood of a taxpayer funded or government bailout.

The financial proposals by the FDF will be put out for consultation and should become law at the earliest by 2028 and UBS will be given between six to eight years to put the changes into practice. However, the government and the FTF have been locked in an open feud with UBS since April 2024, when the government first muted these changes. UBS will now have ample opportunity to lobby lawmakers and ask them to water down the current changes. One lawmaker from the Upper House said, “The real lobbying starts now and we are preparing for negotiations to last for years”.

The FDF has already added that alongside the capital reforms, it is proposing a targeted strengthening of the capital base at UBS, which will include the treatment of assets that are not sufficiently recoverable in times of crisis such as deferred tax assets. The FDF said that “regulatory treatment of such assets need to be tightened” and will result in UBS being required to add additional capital over and above of what is already required. In a note to employees seen by a major news outlet, UBS chairman said to the staff “We are disappointed by today’s announcement … we will stand our ground”.