Swiss Senate delays decision on tougher UBS capital rules

The Senate has delayed a vote that could reshape UBS’s capital structure. Switzerland’s Council of States ran out of time on Thursday, September 17, while debating stricter capital requirements for systemically important banks with substantial foreign holdings. The debate will resume next week, leaving the most consequential proposals unresolved.

The legislation would affect UBS in practice because it is currently the major Swiss bank that fits the framework. The Federal Council wants UBS to back its foreign subsidiaries with 100% common equity tier 1 capital, known as CET1. CET1 is the highest quality form of bank capital and consists primarily of shareholders’ equity and retained earnings.

UBS strongly opposes the government’s approach. The bank says the measure could require approximately $22 billion, or CHF18 billion, in additional core capital. That figure has put the issue at the centre of a broader parliamentary debate over how Switzerland should protect itself against a future banking crisis while preserving the international competitiveness of its largest bank.

Because the Senate did not reach the minority motions, the final balance between financial safeguards and operating costs remains unsettled.

The government’s proposal would demand full CET1 backing for UBS’s foreign subsidiaries. Under the plan before the Senate, overseas units of systemically important banks would need to be supported entirely by hard core capital. The requirement targets the capital available to absorb losses directly, rather than relying partly on instruments that can convert or be written down under stress.

The proposal reflects Switzerland’s experience as the home of a globally active bank whose foreign operations could become critical during a crisis. Requiring capital to sit behind those subsidiaries would give Swiss authorities a larger financial buffer and a clearer source of loss absorption if a unit ran into difficulty.

UBS has argued that the change would come at a high cost. Its estimate of CHF18 billion in extra core capital represents funds that could otherwise support lending, investment, share buybacks or other corporate priorities. The source report does not specify how UBS would meet the requirement or how the increase would affect its business lines.

The Senate debate is therefore focused on the design of the rule as well as its headline number. Lawmakers must decide how much protection foreign operations require and which forms of capital should count toward that protection.

The Senate committee has offered a middle course, raising hard capital backing to 50%. The majority of the Economic Affairs Committee of the Council of States, known as WAK-S, has proposed tightening the current too-big-to-fail framework without adopting the government’s full-CET1 model.

Under the committee plan, 50% of foreign holdings would be backed by CET1 capital, up from the current 45%. The remaining 50% could be supported by additional tier 1 bonds, or AT1 instruments. These securities can absorb losses under defined conditions, but they are distinct from ordinary equity and are treated differently from CET1 capital in the regulatory framework.

The proposal would also alter the existing mix. Current rules provide for 45% core capital plus 17% AT1 bonds for the relevant foreign holdings. UBS rejects the committee’s approach as well, according to the source report, although the report does not give the bank’s detailed reasons or a separate cost estimate for this alternative.

The committee’s position now sits between the Federal Council’s 100% requirement and the existing rules. That structure gives the Senate several possible landing points when it resumes debate, including further amendments to the proportions or the instruments allowed.