Swiss lawmakers signal compromise on $22bn UBS capital plan

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Swiss lawmakers have assured senior UBS executives that they will water down stringent new rules as Bern finalises a decision on how much capital the country’s largest bank should hold.

Senior parliamentarians have privately told UBS executives they would come up with a compromise on the finance ministry’s proposals, which would increase its capital requirements by $22bn, according to people familiar with the situation.

The “too big to fail” reform package was unveiled last year by Swiss finance minister Karin Keller-Sutter in response to the collapse of Credit Suisse in 2023. 

The government’s decision could be published as soon as April, while the most contentious element — the foreign capital requirements — will move to parliament for debate.

The issue has raised questions over Switzerland’s position as a global financial centre. Regulators argue that the rules are necessary to protect depositors, while critics say it will harm the country’s competitiveness.

A core group of lawmakers, who argue that the capital requirements are too stringent, has this year indicated to UBS that they would “solve the problem by agreeing on a compromise”, according to one of the people.

While the group is influential, any proposal could still face opposition from other parties, including those on the left.

Switzerland is deciding how much risk the country is willing to tolerate from its last remaining global banking champion, whose balance sheet is sizeable relative to its domestic economy.

UBS executives have grown frustrated with what they see as the unwillingness of the Swiss government to negotiate on the reforms, and are pinning their hopes on parliament to moderate the proposals.

The bank has warned that the proposed rule changes risk putting it at a competitive disadvantage internationally and would leave the Swiss finance sector more strictly regulated than rival jurisdictions such as the US and the UK.

UBS executives have privately warned that failure to reach a compromise could push the bank to move to a more favourable jurisdiction.

The finance ministry rejected a compromise proposal put forward by lawmakers late last year that would have allowed UBS to use additional tier one debt to meet half of the new capital demands, underscoring the limits of parliament’s influence at that stage.

One person involved in the discussions warned that the terms of any new compromise had not been decided but noted that a key parliamentary economic affairs and taxation committee would “take over” the process in May. “We will have more decision-making power” from that point, the person said.

The committee is one of several within the Swiss parliamentary system responsible for drafting, reviewing and amending legislation related to economic policy, tax and trade. The proposals are then likely to be debated by lawmakers from June.

There are two main parts of the government’s “too big to fail” package. First, so-called ordinance changes — a form of executive regulation not requiring a parliamentary vote — will focus on the quality of UBS’s capital, tightening the treatment of items such as deferred tax assets, in-house software and other hard-to-value assets.

These would add between $2bn and $3bn to UBS’s core capital requirements. However, analysts estimate the broader figure could be as high as $11bn because the measures will restrict the types of capital UBS can count towards its regulatory requirements.

Second, UBS would be required to hold substantially more capital against its international operations, in particular by increasing the amount of equity backing its foreign subsidiaries. The changes are designed to ensure that pivotal units can be stabilised or resolved independently in a crisis, without relying on support from the Swiss parent.

Swiss lawmakers have greater scope to influence or dilute the larger $20bn capital component held against foreign subsidiaries, raising the prospect that the final burden could be materially reduced.

UBS declined to comment. One person familiar with its thinking said the package could still prove bad for the bank overall: “Even if assurances are made, there is no guarantee that the end result will be palatable.”

In December, UBS shares hit a 17-year high above SFr35 on hopes of a compromise on capital rules. However, the stock has fallen more than a fifth this year and closed at SFr29.56 in Zurich on Monday.