Key Takeaways
- Swiss lawmakers have proposed a compromise allowing UBS (UBS) to back its foreign subsidiaries with 50% Common Equity Tier 1 (CET1) capital and 50% Additional Tier 1 (AT1) debt.
- The proposal significantly softens the Swiss government's original demand for 100% CET1 backing, which would have required an estimated $20 billion in additional high-quality capital.
- The move is seen as an interim victory for UBS (UBS), potentially lowering the bank's total new capital burden from $20 billion to approximately $15 billion or less.
- Legislative approval remains pending, with a vote in the upper house scheduled for the autumn session starting September 14, 2024.
The Economic Affairs and Taxation Committee of the Swiss parliament's upper house has recommended a major concession regarding capital requirements for UBS (UBS). On Monday, the committee voted 10 to 2 in favor of a proposal that would allow the bank to meet half of its foreign subsidiary capital obligations using Additional Tier 1 (AT1) bonds. This decision directly challenges the Swiss Federal Council's push for 100% CET1 backing, a measure designed to prevent a repeat of the Credit Suisse collapse.
The compromise aims to balance national financial stability with the global competitiveness of Switzerland's last remaining megabank. UBS (UBS) has argued that the government's original $20 billion capital demand was "excessive" and would place it at a disadvantage compared to international peers. By allowing 50% of the buffer to be composed of cheaper AT1 debt, lawmakers hope to reduce the bank's cost of capital while still ensuring its foreign units are "fully capitalized" in a technical sense.
However, the committee emphasized that this flexibility comes with a caveat: AT1 instruments must be reformed to ensure they bear losses earlier during a crisis. This follows the controversial $17 billion write-down of Credit Suisse AT1s in 2023, which shook investor confidence in the asset class. The new proposal suggests a two-stage trigger system where coupons and dividends would be suspended long before a bank reaches the point of total failure.
The legislative road ahead remains long and uncertain for the Zurich-based lender. While the committee's stance sets a significant precedent, the bill must still pass a full vote in the Council of States in September before moving to the lower house. Analysts suggest that the lower house may take a stricter line, potentially pushing for 70% to 80% CET1 backing instead of the committee's proposed 50% split.
Market reaction to the news has been cautiously optimistic as investors weigh the potential for lower-than-expected capital hits. If the 50/50 split is enacted, some estimates suggest the immediate CET1 impact could be as low as $400 million, though the total capital requirement would still rise significantly from current levels. Final regulations are not expected to be fully implemented until 2027 or 2028 at the earliest.
Ed Liston is a senior contributing editor at TheStockMarketWatch.com. An active market watcher and investor, Ed guides an independent team of experienced analysts and writes for multiple stock trader publications.