UBS Chief Executive Sergio Ermotti has warned Swiss lawmakers that excessively stringent capital requirements could weaken the bank’s competitiveness and ultimately impose costs on customers and employees, days before parliament is due to decide how far to tighten regulation following the collapse of Credit Suisse.
Switzerland’s upper house of parliament is scheduled to vote on Wednesday on new capital rules for UBS, which acquired its troubled rival in an emergency takeover arranged by Swiss authorities in 2023.
The debate has become a test of how far Switzerland should go to prevent another banking crisis without imposing requirements that could make its largest bank less competitive internationally.
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The Swiss government has proposed rules that would require UBS to hold about $20 billion in additional capital. The measures are intended to strengthen the bank’s ability to absorb losses and reduce the potential burden on taxpayers if it were to encounter another severe crisis.
Ermotti, however, said UBS could accept some tightening but rejected the government’s proposal to require the bank to back its foreign subsidiaries with 100% Common Equity Tier 1 capital.
“It’s a mistake to believe the additional costs will only be borne by shareholders,” Ermotti told Neue Zuercher Zeitung. “Customers and employees will be affected, too.”
The dispute centers on how UBS should capitalize its foreign operations and what form that capital should take.
A parliamentary committee in the upper house agreed last month to a compromise under which UBS could satisfy half of the requirement using Additional Tier 1 capital, a form of bank capital generally considered less expensive than Common Equity Tier 1.
UBS estimates that it would need to raise about $13 billion in AT1 capital under that proposal.
Ermotti said the requirement would be painful but manageable for the bank.
A tougher alternative has since gained attention among lawmakers. During an upper house debate on Thursday, there were indications that some parliamentarians were considering requiring UBS to fund 90% of its foreign units with CET1 capital.
Ermotti said that proposal would go too far.
“We can live with a black eye, but two black eyes and a broken nose is too much,” he said. “Yet that’s exactly what the demand for capital backing of 90% or 100% comes down to.”
The disagreement goes to the heart of the lessons Switzerland has drawn from the Credit Suisse collapse.
Credit Suisse failed after years of financial and management problems culminated in a loss of market confidence in March 2023. The Swiss government and regulators arranged its takeover by UBS to prevent a disorderly collapse that could have threatened financial stability.
The emergency rescue also exposed the limits of Switzerland’s existing framework for dealing with a systemically important bank.
The government now wants UBS to have a larger capital buffer, reducing the likelihood that public funds would be needed in a future crisis. UBS, meanwhile, argues that forcing it to hold significantly more expensive capital could reduce returns and make it less competitive against international rivals that operate under different regulatory regimes.
The disagreement has become increasingly public.
UBS Chairman Colm Kelleher said last week that the bank would have to consider its future in Switzerland carefully if the new rules became so restrictive that it could no longer compete effectively.
Ermotti’s latest comments bolster that warning while drawing a line between regulation UBS can absorb and requirements the bank considers excessive.
The outcome could have consequences beyond UBS’s shareholders. Higher capital requirements can increase a bank’s resilience because shareholders provide a larger cushion against losses. But capital is also more expensive than debt and other forms of funding, meaning banks can seek to recover higher costs through pricing, reduce certain activities or accept lower returns.
That is the trade-off Swiss lawmakers are now being asked to weigh.
Ermotti also argued that Swiss regulators and policymakers should examine their own role in the Credit Suisse failure. He said the Swiss Financial Market Supervisory Authority, known as FINMA, and the Swiss National Bank bore some responsibility for the bank’s demise.
The parliamentary decision will therefore determine more than the immediate amount of capital UBS must raise. It will help establish the regulatory framework governing Switzerland’s largest bank after the country’s most serious banking crisis in decades.
However, the issue for UBS is whether the additional protection demanded by policymakers can be achieved without materially damaging the economics of its global business. But the Swiss authorities face the challenge of ensuring that the next banking crisis, if one occurs, does not again leave the state facing the choice between rescuing a major institution and accepting potentially severe consequences for the financial system.