Planned capital reforms have been a big cloud over UBS’s share price ever since the government started discussing them last year
by Bastian Benrath-Wright and Levin Stamm
A group of influential Swiss lawmakers proposed watering down the capital demands that the country wants to impose on UBS Group AG, sending shares to a 17-year high.
The senior legislators presented recommendations that would allow UBS to use a kind of junior debt known as AT1 bonds instead of equity to meet potentially fresh capital requirements envisioned by the Swiss government. They also floated the idea to continue letting it use at least some of its software and tax credits to count toward the capital demands, though they also included a rule that would place a cap on investment banking growth.
The stock jumped as much as 5%, hitting the highest level since February 2008.
The proposals could point a way out of the political standoff around the government’s effort, led by Finance Minister Karin Keller-Sutter, to tighten bank rules in a move that threatens to impose as much as $26 billion in new capital demands on UBS. It follows on similar criticism of that push in Switzerland’s two chambers of parliament.
The planned capital reforms have been a big cloud over UBS’s share price ever since the government started discussing them last year. UBS has indicated it may need to reduce investor payouts if they were implemented in full.
“So far it’s the worst-case scenario that has been on the table” for UBS, but if it becomes clear that it won’t materialize, “the situation will change significantly,” Vontobel analyst Andreas Venditti said. The share price jump shows the proposal from the lawmakers “carries a completely different weight” as it points to future voting behavior in parliament, he said.
Keller-Sutter has argued that the tight rules are necessary to ensure Switzerland’s banking industry remains resilient and it will never again pose a huge threat to the country like it did three years ago during the demise of Credit Suisse. But politicians, business leaders and UBS itself have warned that the reforms would render Switzerland’s biggest lender uncompetitive and damage the country’s economy.
“The capital base of systemically important banks, and UBS in particular, must be the strictest in the world,” the lawmakers including Liberal party member Thierry Burkart and Swiss People’s Party member Thomas Matter said in the proposal, first reported by NZZ. “But the gap to the rules of leading financial centers in the EU, UK, US and Asia must never be so wide that competitiveness is no longer guaranteed.”
“We need to find the optimal balance,” they said.
UBS signaled a cautiously positive reaction in a statement responding to the lawmakers’ paper. The fresh proposals are pointing “in a more constructive direction than the extreme approach” of the government, the bank said. The firm “continues to advocate for a strengthening of the regulatory framework with targeted, proportionate and internationally aligned measures,” it said.
The lawmakers also proposed that UBS should be allowed to continue counting certain items of so-called intangible capital including software and deferred tax assets as part of its regulatory tally. The government is pushing to eliminate that ability.
Also included in the plan is a recommendation that UBS should be required to keep its investment bank — and the relatively risky activities in it — under 30% of the firm’s risk-weighted balance sheet. The bank would already meet this requirement, though it has proposed making the restriction permanent, Bloomberg has reported. If the bank breaches this cap, regulators should be allowed to impose capital surcharges, the politicians proposed.
The compromise plan doesn’t have any immediate effect, as parliament isn’t expected to debate the capital reform before 2027. But under the consensus-focused Swiss political system, the proposal could influence government policy until then.
Cheaper Capital
The Swiss reform plans consist of two parts. The smaller part, which would downgrade how balance sheet items like software and deferred tax assets can be counted as equity, can be implemented by government decree. The measures are estimated by the government to lift UBS’s capital requirements by about $3 billion.
The other part, which will need parliamentary approval to take effect, would force UBS to hold full equity backing in Switzerland for its foreign subsidiaries. The change is estimated to translate into a capital gap of about $23 billion for UBS.
AT1s bonds are a cheaper form of capital than equity as they are a junior form of debt, though they can sometimes be converted to equity when certain conditions are met. They were broadly adopted as an additional way to create capital in the wake of the 2008 financial crisis.
Copyright Bloomberg News
