Swiss lawmakers weigh UBS capital rule compromise amid relocation risk

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Swiss UBS capital rule compromise

Highlights

Swiss lower house committee begins October 26 debate on upper house-approved rules requiring UBS to back foreign units with 90% CET1 capital, up from the current 60%.
Compromise proposals include a 75% CET1 requirement with additional loss-absorbing triggers, but prospects for materially lighter regulation remain slim due to political risk.
Investor and shareholder pressure mounts as proposed rules raise UBS competitiveness concerns, prompting contingency plans involving potential headquarters relocation or merger discussions.

Parliament debate centers on CET1 threshold

As reported by Reuters, a lower house committee is due to begin debating on October 26 banking rules approved last month by the Swiss upper house, with UBS management indicating the measures are intolerable. The debate focuses on how much Common Equity Tier 1 capital UBS should hold against its foreign units, an issue that has become central to the bank's future regulatory burden.

The upper house decided UBS should back its foreign units with 90% CET1 capital, up from a current 60% buffer that can be partly met with cheaper capital. The Swiss government proposed a stricter 100% CET1 requirement, while Finance Minister Karin Keller-Sutter wants parliament to sign off on the 90% target, according to a person familiar with the matter.

Compromise ideas are circulating, but prospects for significantly lighter rules appear slim. Hans-Peter Portmann of the centre-right Liberal Party, or FDP, has floated a 75% CET1 requirement for UBS' foreign units, combined with a mechanism to strengthen loss-absorbing capacity if capital ratios fall below a set level.

Political and market pressure narrows options

Lawmakers say the political room for manoeuvre is limited because softer rules could face a public backlash. Leo Mueller, a Centre Party lawmaker on the committee, says parliament risks ending up with no solution if a watered-down outcome is challenged in a referendum and then rejected.

The Social Democrats, who support a 100% CET1 standard, say they will decide whether to seek a referendum only after parliament makes its choice, which is not expected before December at the earliest. That keeps the possibility of prolonged uncertainty over UBS and the Swiss banking framework in place.

At the same time, pressure is building from investors who argue the proposed rules could undermine UBS's competitiveness. Sources told Reuters the bank is drafting contingency plans that include shifting its headquarters or merging with another lender, although UBS has repeatedly said it wants to remain in Switzerland and maintains that its presence benefits both the bank and the country.

Some shareholders have openly backed a tougher response from the bank. Artisan Partners has publicly urged UBS to leave Switzerland, but any move would also force the Zurich-based wealth manager to weigh the financial and reputational cost of losing its Swiss identity.

In our earlier article on UBS Global Wealth Management’s outlook for the Federal Reserve, we covered the bank’s expectation that persistent inflation would extend the tightening cycle, with additional rate hikes priced in by markets. We noted UBS’s view that overlapping shocks—from firm services inflation to supply and trade risks—could keep borrowing costs higher for longer, tightening financial conditions for banks and investors.

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