UBS signals reluctant support for capital compromise

UBS has given Switzerland’s capital debate a grudging green light, just days before lawmakers vote. Chief executive Sergio Ermotti and chairman Colm Kelleher have both indicated that a parliamentary compromise allowing AT1 bonds to count toward part of UBS’s new capital obligations would be bearable for the bank. Neither executive supports the proposal outright.

The Senate is due to vote on September 23, 2026, in the next stage of a legislative fight over how Switzerland should regulate its largest bank. The decision will help determine how much equity UBS must hold against the value of its foreign subsidiaries, a question that has gained urgency since UBS absorbed Credit Suisse in an emergency takeover arranged by the Swiss government in 2023.

UBS has repeatedly rejected the government’s draft law as too costly. Its latest comments suggest the bank would moderate its campaign against the overhaul if lawmakers select the AT1 compromise. That could influence a debate involving the Federal Council, parliament, investors and a public still weighing the risks of an enlarged UBS. The Senate’s choice will not end the process, but it will set the political direction for the final law.

The government plan would lift the required backing for UBS’s foreign subsidiaries from 60% to 100%. Under the proposal submitted by the Federal Council, UBS would have to support the full value of those foreign units with common equity tier 1 capital, known as CET1, held at its Swiss domestic parent.

CET1 is the strongest form of bank capital because it consists largely of shareholders’ equity and retained earnings. AT1 bonds occupy a different place in the capital structure. They can absorb losses under certain conditions, but they are debt instruments and generally carry coupon payments. The Senate committee’s compromise would allow AT1 bonds to cover as much as half of the proposed 100% requirement.

Lawmakers therefore face three options. They can back the government’s 100% CET1 approach, support a separate plan setting the requirement at 90%, or approve the AT1 compromise, which retains a 100% headline requirement while permitting limited use of AT1 instruments. The government has rejected the AT1 solution. The vote will show whether parliament prioritises a larger equity buffer or a less demanding adjustment for UBS.

RBC analysts estimate a 10% hit to UBS earnings per share if the government’s full backing plan becomes law. That figure explains why the bank has mounted a sustained public campaign against the proposed rules and why investors are watching the parliamentary process closely.

Higher equity requirements would force UBS to retain more capital or raise additional funds, limiting the money available for distributions, acquisitions and other uses. The exact effect would depend on the final legislation, implementation timetable and the treatment of capital instruments. UBS has not disclosed an ideal capital ratio through Ermotti’s latest interview.

The chief executive said naming a preferred figure could make it appear that parliament had simply followed UBS’s instructions. He described the political environment as “UBS against the rest,” a sign of the difficult position the bank occupies after the Credit Suisse rescue. The takeover increased UBS’s scale and strengthened arguments for a larger loss-absorbing buffer. It also left the bank defending its returns and competitiveness against demands from regulators and politicians for more protection. For shareholders, the September 23 vote is an early indicator of the potential cost of Switzerland’s new too-big-to-fail framework.

The Credit Suisse takeover remains the political foundation of the capital overhaul. UBS agreed to buy its troubled rival in early 2023 through an emergency transaction engineered by the Swiss government, which feared that the failure of Credit Suisse could trigger a broader financial crisis and damage Switzerland’s reputation as a financial centre.

The rescue created a bank with a larger balance sheet, a wider international footprint and greater potential consequences for the Swiss economy if it ran into trouble. The Federal Council’s proposed 100% CET1 requirement reflects that concern. Officials want UBS to carry more high-quality capital at its Swiss parent, where it could help absorb losses affecting foreign subsidiaries.

UBS argues that the government’s approach would impose a burden large enough to weaken the bank’s competitiveness. Its executives have not embraced the Senate compromise, but their use of the word “bearable” marks a shift from outright opposition to conditional acceptance. That distinction matters in Bern. A compromise could ease the confrontation while preserving a higher formal requirement than today. It could also leave unresolved the broader question of how much risk Switzerland should accept from a global bank headquartered in the country.

The September 23 vote will begin another phase of negotiation, not settle the law. The Senate must choose among the government proposal, the 90% alternative and the AT1 compromise before the measure continues through Switzerland’s legislative process. The final rules could still change as the two chambers reconcile their positions and the government responds.

For UBS, the immediate stakes are capital allocation, earnings and the structure of its balance sheet. For Switzerland, the issue reaches beyond one bank’s quarterly results. A stronger equity base could reduce the public exposure created by a future crisis, while a compromise could limit the competitive and financial pressure associated with the government’s most demanding plan.

Ermotti has said the AT1 proposal would still be a blow, even if UBS could absorb it. Kelleher’s parallel assessment indicates that the bank’s leadership sees the compromise as preferable to the government’s 100% CET1 approach. Their reluctant support gives lawmakers room to claim a negotiated outcome, while leaving the core dispute intact: how much capital should a global bank hold in Switzerland after the country helped prevent Credit Suisse’s collapse?