Swiss lawmakers consider controversial bonds to ease UBS capital demands

Swiss parliamentarians are deliberating on new capital requirements for UBS, with a key economic commission set to discuss proposals that could significantly impact the banking giant. The original plan from the Federal Council, if fully implemented, would compel UBS to increase its core equity capital by an estimated $22 billion.

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Extreme.

This stringent proposal, which requires UBS to fully back its foreign holdings with hard equity capital (CET1), has been described as "extreme" by UBS CEO Sergio Ermotti. The discussion is essentially a "Lex UBS" as it uniquely affects the globally systemic Swiss bank. After months of deadlock, movement is now occurring within the commission.

Several proposals are on the table. While the Federal Council's strict plan remains a possibility, alternative suggestions are being considered that would be more accommodating to UBS. These proposals primarily focus on whether UBS should be required to fully back its foreign subsidiaries with equity, or if a partial backing, supplemented by other instruments, would suffice. The current regulation mandates that foreign subsidiaries be backed by 45% hard equity capital.

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The Federal Council's proposal could be weakened.

A significant point of contention is the potential increased role of AT1 (Additional Tier 1) bonds. These are financial instruments that can be converted into equity or written off in times of bank distress. A group of center-right parliamentarians, led by FDP National Councilor Thierry Burkart, advocates for allowing UBS to meet a portion of its capital requirements using these AT1 bonds, which are considerably cheaper than hard equity. However, AT1 bonds have a controversial history, particularly concerning the Credit Suisse collapse, where their application led to legal ambiguities.

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The discussion is essentially a Lex UBS, as it uniquely affects the globally systemic Swiss bank.