Swiss Government Proposes New Capital Rules for UBS
The Swiss government introduced stringent capital requirements on Friday, mandating that UBS, one of the largest banks in the country, maintain an additional $26 billion in core capital following its acquisition of troubled rival Credit Suisse in 2023.
This adjustment means UBS will have to fully capitalize on its international units, which could lead to a smaller share buyback than initially expected.
The government explained that in order to reduce UBS’s holdings of additional tier 1 (AT1) bonds to around $8 billion, the bank must acquire CET1 capital of up to $26 billion.
Interestingly, while this measure adds a significant $26 billion to core capital, it also represents only $18 billion in new capital—about $2 billion short of what JPMorgan had assessed earlier in the week.
Since the announcement, UBS shares have climbed by 6%.
Johan Scholtz, a senior equity analyst at Morningstar, remarked that the situation could be interpreted as quite serious for UBS. He believes the bank may negotiate for some concessions and take steps to lessen the impact, like moving excess capital from its subsidiaries. However, the process of implementing these measures could take a while, with full application not expected until 2034.
The Swiss National Bank expressed support for the government’s actions, stating they would significantly enhance UBS’s resilience. The aim is not only to lessen the chances of major banks like UBS encountering financial crises but also to empower them to stabilize themselves during turbulent periods.
Concerns Over “Too Big to Fail”
UBS is grappling with tougher capital rules aimed at curbing risks associated with the nation’s second-largest bank, following a series of mistakes and controversies at Credit Suisse.
The unexpected downfall of such a major banking entity has raised alarms, putting Swiss financial regulators under scrutiny.
Authorities contend that stricter capital requirements are crucial for safeguarding the national economy, especially as banks’ total assets exceeded $1.7 trillion in 2023—almost double Switzerland’s economic output last year. Conversely, UBS has argued against the “too big to fail” notion, suggesting that enhanced capital requirements could impair its competitiveness.
Central to the debate is UBS’s potential to handle losses from its foreign subsidiaries.
Elevated capital requirements could tighten the bank’s balance sheet and limit credit availability, leading to increased costs for lenders and a reduced willingness to take risks. For shareholders, this raises concerns about diminished discretionary funds for things like dividends and buybacks.
As noted by a senior equity analyst at Morningstar in a memo before the FINMA announcement, UBS must free up capital from Credit Suisse’s legacy operations to cut costs. However, many benefits may be offset by new regulatory demands.
The analyst further discovered that the stricter measures might outweigh UBS’s capital requirements, potentially putting pressure on returns and complicating long-term valuations. This is especially relevant as even the premium valuation traditionally associated with the European banking sector has recently started to diminish.
In light of the broader implications of Swiss capital rules, the future of UBS’s core global wealth management is under scrutiny, particularly with existing U.S. trade tariffs potentially influencing its direction. In a surprising turn of events, in mid-April, Santander overtook UBS as the most valuable lender in continental Europe.
