Swiss Corporate Credit May Rise as UBS Faces Stricter Capital Rules

Swiss authorities are proposing new regulations that could increase the cost of corporate credit in Switzerland, particularly for UBS. The proposed measures, stemming from the "Lex UBS," mandate that the banking giant must hold sufficient core equity Tier 1 (CET1) capital to cover the entire value of its foreign subsidiaries.

Currently, UBS is required to back approximately 45% of its foreign subsidiaries' book value with CET1 capital. This means if a subsidiary's value drops by 1 franc, only 45 centimes can be absorbed, leaving the Swiss parent company to bear the remaining 55 centimes, potentially causing instability. The new proposal aims to ensure that shareholders, rather than taxpayers, absorb such risks, a lesson learned from the Credit Suisse crisis.

The rationale behind this stricter capital requirement is rooted in UBS's substantial international expansion. Its U.S. subsidiaries, for instance, are significantly larger than its domestic operations and pose a notable risk to the parent company. Furthermore, UBS is the only global systemically important bank whose balance sheet is nearly double the GDP of its home country, highlighting its immense scale and interconnectedness.

These proposed changes could lead to higher borrowing costs for Swiss companies. If UBS needs to bolster its capital reserves to meet these new requirements, it may pass on these increased costs through higher interest rates on loans and other financial services it provides to the corporate sector.