Switzerland poised to pitch tough new capital rules for UBS

By Ariane Luthi and Oliver Hirt

ZURICH (Reuters) -The Swiss government is this week widely expected to propose tough new capital rules for UBS following the 2023 collapse of its rival Credit Suisse, ushering in a long battle in parliament over the closely watched regulations.

UBS acquired Credit Suisse at a knock-down price in March 2023, and shock over the demise of Switzerland's second-biggest bank after a string of scandals sparked a chorus of calls to toughen regulations so there could be no repeat meltdown.

Central to these so-called "too big to fail" plans sketched out by the government last year is the degree to which UBS should capitalise its foreign subsidiaries to mitigate risk.

That question should be answered on Friday when the government presents its proposals. Analysts, lawmakers and the bank itself expect the rules will demand UBS fully capitalise the units - despite the bank's opposition.

"The market would be surprised if the federal cabinet did not demand 100% capitalisation of foreign units," said Vontobel analyst Andreas Venditti, pointing to comments by regulators and how UBS shares are undervalued vis-a-vis competitors. 

According to the bank's own calculations, full capitalisation of the foreign subsidiaries would require UBS finding upwards of $20 billion in additional capital.  

UBS argues that such a burden would put the Zurich-based lender at a disadvantage against rivals and undermine Switzerland's competitiveness as a global financial centre.

"The winners will be our competitors outside Switzerland," UBS CEO Sergio Ermotti told an event near Lucerne last month. "Those guys are just waiting for the nonsense to happen."

But the Swiss National Bank and financial market regulator FINMA, both of which drew fire for their response to the Credit Suisse meltdown, have backed full capitalisation of the units.

UBS has floated concessions to avert such an outcome and has examined a host of scenarios, including moving its headquarters abroad. However, executives say it is not planning that.

Many of the lawmakers, UBS sources and analysts Reuters spoke to for this story believe the regulations will likely be diluted during the legislative process. Final legislation for the new rules is expected in 2027 at the earliest.

REALIGNMENT

The new Swiss regulations could trigger a realignment of UBS's business model, which is currently geared around growth in the United States and Asia, investors say.

"UBS will have to switch into a cost optimisation, risk-weighted assets optimisation mode rather than a growth mode," said Antonio Roman, portfolio manager at Axiom Alternative Investments.

If UBS had to fully capitalise its foreign units it would have a required CET1 ratio of 17 to 19%, according to the bank's own calculations. That compares with 2024 requirements on competitors Deutsche Bank of 11.2% and Morgan Stanley of 13.5%.

A parliamentary inquiry noted that since the Credit Suisse takeover, UBS has had a balance sheet bigger than the Swiss economy and urged the government to give suitable consideration to the foreign units of globally relevant banks.

"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," Neil Esho, Secretary General of the Basel Committee on Banking Supervision, recently told Reuters.

Once new rules are set, the bank will likely have a phase-in period to adjust, and full compliance should not be required until the 2030s, banking experts say.

"The adjustment can't be done all at once," said Hans Gersbach, a banking and economics professor at ETH Zurich university. "Otherwise it's more destabilising than stabilising."

(Reporting by Ariane Luthi and Oliver HirtEditing by Dave Graham and Susan Fenton)