UBS to face tougher rules in Swiss response to Credit Suisse rescue

In 209 pages of recommendations on how to police banks deemed "too big to fail" (TBTF), the Swiss government pitched 22 measures for direct implementation. It stopped short of saying how far stricter capital requirements should go. KEYSTONE/© KEYSTONE / MICHAEL BUHOLZER

Switzerland's government said on Wednesday that UBS and three other systemically relevant banks must face tougher capital requirements to shield the country's wider economy, a year after the rescue of Credit Suisse.

In 209 pages of recommendations on how to police banks deemed “too big to fail” (TBTF), the Swiss government pitched 22 measures for direct implementation. It stopped short of saying how far stricter capital requirements should go.

The TBTF plan will come under close scrutiny in Switzerland and beyond because if UBS were to unravel, there are no local rivals left that could absorb it. A bailout and nationalisation would likely cause serious damage to public finances.

“The quantitative and qualitative capital requirements for systemically important banks should be tightened in a targeted way and supplemented with a forward-looking component,” the government said in a summary of its recommendations.

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The increase in requirements for UBS will be “substantial, especially if UBS were to retain its current size and structure, or even grow,” it noted in an explanatory document. Shares in UBS were down 1.9% at 1230 GMT after trading in them was briefly halted. UBS declined to comment on the report.

The Swiss government-backed takeover by UBS of Credit Suisse last year was the biggest merger of banks of systemic importance since the 2007-9 financial crisis.

Switzerland aims to put the measures into effect quickly and present two packages for implementation in the first half of 2025, one with changes at ordinance level which can be approved by the government, and another for consideration by parliament.

At around $1.7 trillion, the UBS balance sheet is now double the size of Switzerland’s annual economic output, giving it an exceptional weight for a major economy. The government said it rejected the idea of putting into law the option for temporary public ownership of a bank in crisis.

The report floated giving extra powers to Swiss market regulator FINMA, the possibility of applying capital surcharges and strengthening the financial position of subsidiaries, but shied away from a “blanket increase” in capital requirements.

“It is difficult to reach a final judgement on the exact impact of increased capital requirements,” it said, noting that they should factor in “proportionality” given competitive pressures facing Swiss banks.

“Preference should therefore be given to measures that are aimed at strengthening the capital requirements of (systemically important banks) and increasing their transparency, and which provide clarity and room for manoeuvre in a crisis, even in the case of complex bank structures,” the report said.

Stricter rules come amid increased scrutiny of Switzerland’s banking culture. The lower house of parliament last month backed a motion to claw back pay from senior management if banks are rescued by public money.

The government’s TBTF report said it will also consider potential claw backs for bonuses.

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Analysts have forecast UBS might have to find billions of extra dollars to safeguard against the risk that it too could suffer a meltdown, but the process is likely to take time as the government said it would wait on the findings of a parliamentary investigation into Credit Suisse’s demise. Those are not due until near the end of 2024.

International concern

In the lead up to the report’s publication, international organisations raised concerns over the bank mega-merger and its aftermath, including the IMF and the OECD. The Financial Stability Board, a global financial watchdog, has also cautioned Switzerland about the risks of UBS failing.

The FSB is set to review its ranking of UBS among the list of global systemically important banks after the Credit Suisse takeover, which is due to close later this year. Moving up a notch would lead to higher capital demands.

The Swiss lower house of parliament last year backed a motion calling for systemically relevant banks to have a leverage ratio of 15% of assets, far more than in the European Union, the United States and Britain.

Analysts do not expect such tough terms to be imposed on UBS, which currently has a common equity tier 1 ratio of 14.5%, or $79 billion, equating to a leverage ratio of 4.7%.

“There should be a targeted introduction of the proposed measures for systemically important banks, and in part specifically for UBS as the sole remaining global systemically important bank in Switzerland,” the government said. Higher capital requirements could force UBS to shrink its balance sheet and reduce credit supply, experts say.

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UBS executives have warned that excessive capital requirements would ultimately hurt the consumer, and banking industry insiders say the bank has been lobbying officials. Finance Minister Karin Keller-Sutter said last year that tougher capital requirements were coming – but also said it was important not to hurt Switzerland’s ability to compete with financial centres like New York, London, Singapore and Dubai.

Adapted from German by DeepL/amva

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