UBS faces decisive Swiss capital test

Swiss lawmakers are opening a politically charged debate in Bern that could determine how much capital UBS Group must hold after its takeover of Credit Suisse, setting the stage for a confrontation between financial stability concerns and fears over Switzerland’s competitiveness as a banking centre.

A 13-member parliamentary panel is meeting on Monday to begin work on proposed changes to the Banking Act, a legislative package shaped by the collapse of Credit Suisse and the emergency rescue that left UBS as Switzerland’s only global bank. The measures would require systemically important banks to fully back foreign subsidiaries with Common Equity Tier 1 capital, the highest-quality loss-absorbing buffer.

The proposal is aimed squarely at UBS, even though it is drafted as a system-wide rule. Government estimates indicate the bank may need roughly $20 billion in additional core capital once the changes are fully implemented. Earlier industry estimates had put the potential burden higher, at about $24 billion, before the Federal Council softened parts of the package while retaining the central demand on foreign subsidiary capitalisation.

The meeting marks the start of a legislative fight that could run well into 2027, with the possibility of further political delays if opponents force a referendum. The timing is critical for UBS, which has been seeking clarity before making longer-term decisions on shareholder returns, balance-sheet structure and the final phase of integrating Credit Suisse.

The Federal Council adopted the dispatch on the Banking Act revision on April 22 and also amended the Capital Adequacy Ordinance. Those ordinance changes, covering items including software and prudential valuation adjustments, are due to come into force in stages from January 2027. UBS has said the ordinance measures alone would cut about $4 billion from its net CET1 capital at group level and reduce its CET1 ratio by around 0.8 percentage points once fully implemented.

Finance Minister Karin Keller-Sutter has argued that the reforms are necessary to protect taxpayers and the broader economy from another banking emergency. The Credit Suisse crisis exposed weaknesses in the existing “too big to fail” framework, despite years of regulatory strengthening after the global financial crisis. Authorities concluded that capital held at parent level was not sufficient to absorb losses in large foreign operations during a severe stress event.

UBS rejects the proposed tightening as excessive. The bank has warned that the measures would raise costs, reduce its ability to compete with US and European rivals, and risk pushing parts of its business out of Switzerland. It has argued that alternative instruments, including Additional Tier 1 capital and bail-in debt, should play a greater role in meeting loss-absorption needs, closer to the approach used in other major jurisdictions.

That argument has gained support among some lawmakers, business groups and cantonal authorities, particularly in Zurich, where UBS is a major employer and taxpayer. Critics of the government plan say Switzerland must avoid turning the rescue of Credit Suisse into a regulatory framework that penalises the stronger bank that absorbed it. They also warn that over-regulation could weaken a financial sector that remains central to national tax revenues, employment and international influence.

Supporters of tighter rules counter that UBS is now too large relative to the Swiss economy to be regulated on assumptions that proved inadequate during the Credit Suisse collapse. The 2023 rescue involved a government-brokered takeover, large liquidity support from the Swiss National Bank and emergency guarantees designed to prevent wider market contagion. Credit Suisse shareholders received UBS shares, while about SFr16 billion of AT1 bonds were written down to zero, a move that unsettled debt investors across Europe.

UBS enters the debate from a position of strong earnings. The bank reported first-quarter net profit of about $3 billion, up sharply from a year earlier, helped by volatile markets, strong trading revenues and continued inflows in wealth management. Global wealth management attracted about $37 billion in net new assets, while the investment bank benefited from higher client activity across equities, foreign exchange and credit.

Those figures strengthen both sides of the argument. Lawmakers favouring tougher capital rules point to UBS’s profitability as evidence that it can absorb higher buffers without threatening its viability. The bank and its allies argue that the numbers show the integration of Credit Suisse is progressing and should not be disrupted by capital rules they regard as disproportionate.

The legislative process will test how far parliament is willing to go beyond international standards. Switzerland already applies stricter requirements than many peers, a system often described as the “Swiss finish”. UBS has argued that the new package could push its CET1 requirements towards levels materially above those faced by comparable global banks.