June 3 (Reuters) — This week, the Swiss government is expected to propose tougher capital rules for UBS (UBSG.S) following the collapse of its rival Credit Suisse in 2023, which sparked prolonged parliamentary debate about tightening oversight.
UBS acquired Credit Suisse at zero cost in March 2023. The shock of the collapse of Switzerland’s second-largest bank after a series of scandals led to calls for stricter regulation to prevent similar situations in the future.
A key element of the government’s plans is a requirement for UBS to fully capitalize its foreign subsidiaries to reduce risks. Official proposals are expected on Friday. Analysts, lawmakers, and the bank anticipate that the rules will require 100% capitalization of foreign units despite UBS’s opposition.
“The market would be surprised if the government did not require full capitalization of foreign subsidiaries,” said Vontobel analyst Andreas Venditti, noting the undervaluation of UBS shares compared to competitors.
UBS estimates this will require raising more than $20 billion in additional capital. The bank argues such demands will put it at a disadvantage versus competitors and undermine Switzerland’s competitiveness as a financial center.
“Our competitors outside Switzerland will be the winners,” UBS CEO Sergio Ermotti said last month.
The Swiss National Bank and regulator FINMA, criticized for their response to Credit Suisse’s collapse, support the idea of full capitalization of subsidiaries.
UBS has considered various scenarios, including moving its headquarters abroad, but management assures there are no such plans.
Many lawmakers and analysts believe the rules may be softened during the legislative process. Final legislation is not expected before 2027.
UBS business model outlook
The new rules may prompt a shift in UBS’s strategy, which currently focuses on growth in the US and Asia.
“UBS will have to shift to optimizing costs and risk-weighted assets rather than growth,” says portfolio manager Antonio Roman.
According to the bank’s calculations, full capitalization of subsidiaries would raise the CET1 ratio to 17–19%, while competitors’ 2024 requirements stand at 11.2% (Deutsche Bank) and 13.5% (Morgan Stanley).
A parliamentary inquiry highlights that UBS’s balance sheet after acquiring Credit Suisse exceeds the size of the Swiss economy, and the government insists on a thorough review of the capitalization of global banks’ foreign units.
“The problem in Switzerland is particularly acute because of the size of UBS’s US subsidiary compared to the parent bank,” said Neil Ashe, secretary general of the Basel Committee on Banking Supervision.
Transition period
After new rules are adopted, UBS is expected to have a lengthy adaptation period, with full compliance not required until the 2030s.
“Changes cannot be implemented immediately, or it would destabilize the system,” emphasized ETH Zurich banking professor Hans Gersbach.