UBS takes a hit in Zurich, challenging capital adequacy rules ahead of the parliamentary vote
(Il Sole 24 Ore Radiocor) - UBS pulls back on the Zurich Stock Exchange ahead of the parliamentary vote on the new capital adequacy rules proposed by Switzerland and after reiterating in a document that the tighter requirements demanded by the Swiss Government would harm the group and the national economy as a whole. The Upper House of the Swiss Parliament will vote on Wednesday on the new capital adequacy rules drawn up following the collapse of Credit Suisse in 2023 and its subsequent rescue by UBS. To prevent further banking crises, the Swiss government wants UBS to cover 100 per cent of its foreign subsidiaries with CET1 capital. A compromise proposal put forward in parliament provides for 90 per cent coverage.
In a supplementary statement published on Monday evening, UBS also contests this latest proposal, emphasising that ‘it does not represent a compromise and would significantly damage the competitiveness ’ of the group. “The proposal for a 90 per cent CET1 coverage is very close to that of the Federal Council (100 per cent CET1) and would force UBS, including the adjustments already made to the Capital Ordinance, to hold approximately $18 billion of additional non-earning CET1 capital, with proportionally high recurring costs”, the statement reads. UBS explains the rationale behind its new position paper on the new regulations, emphasising that ‘the debate on Swiss banking regulation is characterised by divergent interpretations, misunderstandings and incomplete representations of several key issues’ and explaining that ‘as the institution most directly affected by the proposals, it considers it both its duty and its right to clarify the facts before parliamentary debates continue’. UBS “supports regulatory adjustments that are targeted, proportionate, internationally aligned and that address the causes of the Credit Suisse crisis”, the document states. As well as highlighting the damage to its competitiveness, the bank emphasises that ‘the costs of excessive regulation harm the Swiss economy’, adding that UBS itself ‘reflects the strength of the Swiss economy and its size is already taken into account through additional regulatory requirements’.
The bank also disputes the underlying assumption of the new regulations that Credit Suisse’s collapse was due to insufficient capital coverage for its overseas holdings. This is not the case: ‘The collapse of Credit Suisse was attributable to a number of factors, including weaknesses in strategy, corporate culture, governance, risk management and financial management, as well as a lack of regulatory relief. All these factors contributed to the crisis.’ The regulatory concessions granted to Credit Suisse partly masked its capital weakness and delayed the adoption of the necessary measures. As the report by the Parliamentary Commission of Inquiry also states, ‘a consistent application of the existing capital regime and the associated supervision would have allowed for more timely intervention’, is UBS’s counter-argument. The bank also points out that it ‘already has a solid CET1 ratio of around 14 per cent’ and must meet ‘stringent liquidity requirements by international standards’. Higher requirements ‘would not increase safety, but, on the contrary, would substantially increase the cost of capital and undermine the international competitiveness’ of UBS, which estimates the additional CET1 capital required under the 90 per cent proposal at $18 billion and under the 100 per cent proposal at $22 billion.
“The costs do not arise from the creation of capital, but from its holding. UBS would have to finance the entire additional capital of $22 billion… at an annual rate of around 10 per cent,” the document explains. Consequently, ‘The total additional capital requirement in relation to the acquisition of Credit Suisse would rise to around $37 billion, corresponding to additional annual capital costs of around $3 billion. With 90 per cent coverage by CET1, the costs would be only marginally lower’. These annual recurring costs would be in addition to the $15 billion that UBS shareholders have already contributed towards the integration and restructuring of Credit Suisse by the end of 2026, the document summarises. CEO Sergio Ermotti reiterated these points on Tuesday morning at an event organised by Bank of America. Adding to the costs of the Credit Suisse integration and rescue was also a payment of 5 million euros made by UBS to the Dutch authorities in relation to a tax dispute inherited from CS.
