On Friday, the Swiss government announced a proposal for stricter capital regulations that would require UBS, a major banking institution, to maintain an additional $26 billion in core capital in the wake of its acquisition of the struggling Credit Suisse earlier this year.
Alongside these requirements, UBS will be obliged to fully capitalize its foreign subsidiaries and will have to scale back its share buyback programs.
“To respond to the increased going-concern requirement, up to USD 26 billion of CET1 capital must be secured, which would allow for the reduction of approximately USD 8 billion in AT1 bond holdings,” the government stated in its announcement, referring to UBS’ Additional Tier 1 bonds.
The Swiss National Bank expressed its support for these government proposals, indicating that they would “substantially enhance” UBS’s resilience.
“This approach not only minimizes the chance of a significant systemically important bank like UBS encountering financial distress but also expands the bank’s capacity to stabilize itself during a crisis without necessitating government intervention,” the SNB noted in its own statement.
‘Too big to fail’
UBS has faced increasing pressure to comply with tougher capital regulations since acquiring Credit Suisse, which has struggled due to a series of management missteps and scandals.
The sudden collapse of Credit Suisse has also drawn criticism toward Swiss financial regulator FINMA for its perceived inadequate supervision and the timing of its actions.
Regulators argue that UBS must enhance its capital reserves to protect the broader economy and financial system, especially considering that UBS’s balance sheet surpassed $1.7 trillion in 2023—approximately double the anticipated output of the Swiss economy for that year. UBS, however, contends that it is not “too big to fail” and warns that the new capital requirements could hamper its competitiveness by draining liquidity.
At the core of this debate is the concern regarding UBS’s ability to absorb potential losses emerging from its international operations, which currently requires that 60% of capital be backed by the parent bank.
Elevated capital requirements could restrict a bank’s balance sheet and reduce credit availability by increasing funding costs, discouraging lending, and decreasing appetite for risk. The implications for shareholders are significant, potentially affecting distributions like dividends, share buybacks, and bonuses.
Johann Scholtz, a senior equity analyst at Morningstar, noted prior to the FINMA announcement that “while the winding down of Credit Suisse’s legacy operations should free up capital and cut costs for UBS, much of these benefits might be offset by stricter regulatory demands.”
“Such conditions may place UBS’s capital obligations well above those faced by U.S. competitors, impacting returns and hindering efforts to close its long-term valuation gap. Even UBS’s historically premium position in relation to the European banking sector has recently diminished,” he added.
The looming implementation of stringent Swiss capital controls coincides with UBS’s substantial presence in the U.S. through its global wealth management division, amidst challenges like White House trade tariffs affecting its performance. In a surprising turn of events, UBS recently lost its title as the most valuable lender in continental Europe by market capitalization to Spain’s Santander.
