Basel boss signals 'Swiss finish' to capital rules is not unfair on UBS

By Ariane Luthi and Oliver Hirt

ZURICH (Reuters) -The head of the world's banking watchdog said Switzerland's existing rules on bank capital do not unfairly penalise its lenders versus rivals elsewhere, pushing back on arguments UBS has made to oppose government plans to toughen them up.

Under Swiss proposals to make banks hold more capital to make them safer following the 2023 collapse of Credit Suisse, UBS has estimated it could need $40 billion in additional capital compared to where it stood before the emergency takeover of its former rival.

Neil Esho, Secretary General of the Basel Committee on Banking Supervision, told Reuters that it was misleading to focus solely on headline capital requirements when Swiss rules allowed for more flexibility than other jurisdictions regarding which financial instruments could count as capital.

The Swiss regulation also permits capital held in subsidiaries to contribute to the parent bank's requirement, enabling a possible double counting of capital that Basel rules caution against, Esho added.

"The higher number is not necessarily more resilient once you take into account the quality of capital," Esho said in an interview. "I wouldn't buy the argument that Swiss banks are necessarily being disadvantaged relative to other banks."

At UBS' AGM last month, Chairman Colm Kelleher said the bank is already hampered by the existing regulatory "Swiss Finish" - the specific implementation by Switzerland of international standards.

"Adding another Swiss Finish on top – while other financial centres are easing regulations – would harm UBS, the Swiss financial centre and the broader economy," he said.

Esho, in a speech in January, said he favoured quality of capital over quantity while briefly mentioning Switzerland, but the comments to Reuters are his most explicit yet and will feed into the debate ahead of the Swiss government formally proposing new capital rules in June.

Esho also stressed that it was not his place to advise on what governments should do.

The Basel Committee, which sets global minimum requirements for banking supervision, revised its standards after the 2007-2009 financial crisis.

The European Union, Britain and the United States have recently delayed the roll-out of Basel III, the latest iteration, increasing the concerns of UBS executives that Switzerland will be imposing uncompetitive demands.

But Esho said he expected major financial centres would all implement Basel III eventually.

MORE CAPITAL

UBS had to hold 14.82% of risk-weighted assets as Tier 1 capital last year, more than Deutsche Bank's 13.20%, but below U.S. rival Morgan Stanley's 15%.

Analysts say the enlarged UBS will need to hold more capital even before changes to existing rules - Autonomous analyst Stefan Stalmann estimates a ratio of 16.27% by 2030.

Under an "extreme" form of regulation, UBS's Tier 1 ratio could climb to 22.4% by then, the bank recently told lawmakers.

However, Esho pointed to Swiss rules that allowed, for example, a higher share of Additional Tier 1 bonds rather than core equity Tier 1 capital compared to other jurisdictions.

The supervisor also appeared to support the Swiss government's plans requiring UBS to hold more capital in Switzerland.

The Basel Committee framework was designed to ensure that banks had enough capital over the whole consolidated group, Esho said. "What it won't do is ensure that you have capital where you need it in a legal entity," he added.

"The issue in Switzerland is far more important given the nature of UBS and the size of the U.S. subsidiary relative to the parent bank."

(Reporting by Ariane Luthi and Oliver Hirt; Editing by Tommy Reggiori Wilkes, Kirsten Donovan)