Swiss Government Proposes Strictest Capital Rules, Grants UBS Seven-Year Transition Period for Harsh Capital Requirements

Stock News
09/26

The Swiss government officially proposed on Friday to give Switzerland's banking leader UBS Group AG seven years to fully comply with higher capital requirements, confirming previous guidelines. However, it's important to note that the "7-year transition period" is merely a draft proposal released by the federal government with formal consultation initiated, not enacted regulation. The final framework still requires parliamentary review and could only take effect as early as 2028, with referendum uncertainty remaining throughout the process. UBS has already publicly strongly opposed the measures and lobbied the Swiss government to "reduce capital intensity."

In releasing the draft legislation on Friday, the government stated that Switzerland's largest commercial banks, particularly UBS, should "provide adequate capital support for their stakes in overseas subsidiaries." The statement indicated that measured by Common Equity Tier 1 (CET1) ratio, this capital should reach 65% of the target when the law takes effect, then increase by 5 percentage points annually until reaching the 100% target.

According to estimates from various institutions, the Swiss government's current proposal—consolidated after UBS's government-brokered rescue and acquisition of Credit Suisse in early 2023—including capital support for overseas subsidiaries and other less significant changes, could ultimately require UBS to increase its capital requirements by up to $26 billion.

According to recent media reports, the bank has strongly criticized these plans and is seeking to convince the Swiss government to weaken these measures. Therefore, the "capital tug-of-war" between UBS and Swiss regulators has not ended, merely transitioning from the "verbal dispute/preliminary stage" to a new phase of "legislative procedures and technical refinement."

"We strongly disagree with the proposed capital requirement increases, which are excessive and inconsistent with international practices, failing to adequately learn from Credit Suisse's collapse," a UBS spokesperson said in a Friday statement. The spokesperson stated that if the reforms pass in their current form, "UBS's effective minimum CET1 ratio requirement would be at least 50% higher than the average for global systemically important banks."

When the Swiss government first announced plans earlier this year to require UBS to provide adequate capital support for its overseas operations, it indicated intentions to introduce a "six to eight-year transition period." The uncertainty regarding how much additional capital UBS would ultimately need to hold and how quickly it must build this capital has been somewhat suppressing UBS's stock price.

Investors widely worry that the bank's dividend payments could be affected, but even so, UBS ADR prices have risen over 37% year-to-date in US stock markets, significantly outperforming the S&P 500 index. Since the beginning of this year, UBS's US ADRs have repeatedly hit historical highs. If CET1 capital requirements could be moderated, UBS's stock performance might be even stronger.

The phased implementation of capital requirements would begin when the law takes effect; given the need for Swiss parliamentary approval, it's not expected to take effect before 2028. There's also the possibility of a referendum. This means adequate capital support for UBS's overseas subsidiaries is unlikely to be mandatorily required before at least 2035.

According to media reports, sources indicate that UBS has been studying options to mitigate capital impact. These solutions range from technical measures optimizing wealth management operations to more fundamental adjustments such as relocating registration.

The draft legislation released Friday opened a consultation period during which UBS and other stakeholders can formally comment on these plans. The statement indicated this consultation period will last until January 9.

Swiss financial regulator FINMA has expressed support for introducing stricter capital regulatory requirements over several years. Long transition periods are common in financial regulation, aimed at avoiding disruption.

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