The Sobering Truth for UBS
Today, Friday, the Swiss Federal Council is expected to present its message regarding capital requirements for systemically important banks. For UBS, the content is likely to be less than pleasing. However, the final word on this matter is far from spoken.
How much capital do Switzerland’s major banks need? It is generally expected that Finance Minister Karin Keller-Sutter will shed more light on this question today, Friday.
The regulation in question primarily concerns UBS – currently the only systemically important Swiss bank with international operations. Following the integration of Credit Suisse, it has become by far the largest Swiss bank and, in the event of a crisis, would pose a massive risk: with total assets of 1.7 trillion francs ($2.1 trillion), its balance sheet is twice the size of Switzerland’s gross domestic product, and thus double the annual economic output of the entire country.
UBS Group CEO Sergio Ermotti has repeatedly emphasized in recent weeks and months that the bank’s business model is more important than its size. But did this message resonate in Bern? There are considerable doubts.
1. What is to be expected?
The general expectation is that the Federal Council will propose stricter capital requirements. Specifically, UBS will likely have to back its foreign subsidiaries with 100 percent capital instead of the current 60 percent.
In doing so, the Federal Council would largely follow the recommendations of the Swiss Financial Market Supervisory Authority (Finma) and the Swiss National Bank (SNB).
Recent reports suggesting that Finance Minister Karin Keller-Sutter might cave in to lobbying efforts by UBS CEO Sergio Ermotti and UBS Chairman Colm Kelleher are categorized as «wild speculation.» These reports are also based on partially confidential information prior to the publication of the bank stability report that the Federal Council already presented on April 10, 2024 — thus, they are not new but already known.
2. What are the consequences for UBS?
This would be a sobering message for the combined banking giant. Over the past 18 months, the UBS leadership has staged a power play to avoid exactly this outcome. However, the matter is far from settled (see also point 4).
Higher capital requirements are detrimental to the bank’s ambitions. UBS has been aiming to close the gap with American banking giants on an international level. UBS estimates that the stricter rules would raise its Common Equity Tier 1 (CET1) ratio — a key measure of capital strength — to between 17 and 19 percent. By comparison, US banks have lower CET1 ratios; Morgan Stanley’s stands at 13,5 percent.
The Federal Council’s plans are also unlikely to be well received by UBS shareholders, as the bank’s shares may come under additional pressure. A key issue will be the time UBS is given to raise its capital ratio. Anything under ten years is seen as negative by financial market experts.
Regardless, higher capital requirements reduce the chances of future share buyback programs. UBS had aimed to exceed the 2022 buyback volume of $5,6 billion by 2026. However, the bank’s leadership made it clear last April that a new program would only be launched if the CET1 ratio remains at 14 percent and «capital requirements in Switzerland do not change immediately and significantly.»
3. How will UBS respond?
Media have repeatedly suggested that UBS is considering relocating its headquarters if forced to hold more capital. However, there is no concrete evidence for this. On the contrary, UBS Executive Board member Markus Ronner dismissed such speculation during an appearance on Swiss TV’s Arena program in late March, stating that no such plans exist.
However, it is quite conceivable that higher capital requirements could make the banking giant a takeover target due to a significantly lower share price.
Another scenario would be that UBS adopts the so-called Holcim principle: similar to the building materials company, the bank could spin off part of its operations and relocate it abroad.
A relatively obvious option would be a spinoff of the riskier investment banking division, possibly relocating it to London. The idea of separating low-risk and high-risk banking activities is not new — in fact, the US mandated this to a certain extent under the Glass-Steagall Act until 1999. After the 2008 financial crisis, the concept was revived in international discussions, though it was never consistently implemented anywhere.
4. What happens next?
The Federal Council’s proposals will now enter the consultation phase. By the end of the year, the government is expected to present its final proposal. Afterward, the National Council and the Council of States, or their respective parliamentary committees, will take up the issue. For now, it’s hard to gauge the mood in Parliament. A public referendum is also a possibility. In any case, it will be a long time before there is any clarity on the matter.
