UBS today published its response to the Swiss Federal Council’s consultation on the amendment to the Banking Act and the Capital Adequacy Ordinance.

UBS notes that it supports the Federal Council’s objective of drawing lessons from the Credit Suisse crisis and strengthening the regulatory framework with targeted, proportionate, and internationally aligned measures.

However, according to UBS, the proposed full deduction of foreign subsidiaries from Common Equity Tier 1 (CET1) capital extends far beyond the original proposal from 2024 and clearly does not meet these criteria, which is why UBS rejects the proposal.

According to the bank, this measure would put UBS at a significant disadvantage internationally, as UBS would have at least 50% higher capital requirements than its competitors in Europe and the US. These excessive capital requirements would lead to very high costs for the bank and weaken the Swiss financial center and the economy.

UBS stresses that Switzerland already has one of the strictest regulatory capital regimes, with substantial progressive capital surcharges, and a conservative and early implementation of the final Basel 3 rules. The Federal Council’s proposals would significantly increase the requirements and would contrast sharply with developments in Europe and the US, where de-regulation initiatives have already been announced. This, the bank says, would further worsen Switzerland’s international competitive position following the early implementation of Basel 3.

UBS explains that the Credit Suisse crisis was primarily the result of the bank’s unsustainable strategy and insufficient profitability, inadequate risk management, an inappropriate culture, and weak governance. For too long, Credit Suisse was not forced to take corrective action because regulatory concessions tailored to Credit Suisse undermined the regulations that actually applied. The Federal Council’s proposal on capital requirements for foreign subsidiaries is based on the extreme assumption that the parent bank must be able to absorb the total loss of all of its foreign subsidiaries during ongoing operations without any negative impact on the parent bank’s Common Equity Tier 1 (CET1) capital. The proposal extends far beyond the original objective of the Federal Council’s report on banking stability dated April 10, 2024.

While the report called for 100% Tier 1 coverage, the new proposal calls for approximately 130% Tier 1 coverage. For UBS, this would result in additional CET1 capital requirements of approximately USD 23 billion and thus very high costs, not only for UBS, but for the entire financial center, households, and companies.

UBS notes that foreign subsidiaries are an integral part of the consolidated parent bank’s business model. Completely insulating the parent bank from risks arising from foreign business activities that are booked in subsidiaries contradicts the business model of a global bank or any internationally active company, and constitutes a significant restriction on economic freedom. Such a regulation would also only materially affect UBS.

The lessons learned from the Credit Suisse crisis have shown that, on the one hand, existing regulations must be consistently implemented and, on the other hand, subsidiaries must be valued conservatively and without a regulatory filter. This would have made Credit Suisse’s parent bank substantially more resilient.

UBS states that market participants remain concerned that, although UBS would report very high capital under the proposed regulation, it would not be able to use that capital productively and would therefore lose a great deal of competitiveness.

The material additional costs resulting from the proposal would also place a heavy burden on the Swiss economy, as UBS would have to partially offset the additional costs by increasing prices for loans and services in Switzerland. The Federal Council’s argument that UBS would only raise prices abroad fails to take into account that the requirements would be imposed in Switzerland and that UBS would therefore also have to hold the excess capital in its parent bank domiciled in Switzerland. This would happen in an increasingly difficult credit environment with higher refinancing costs.