Karin Keller-Sutter Blasts Lawmakers Plan To Ease UBS Capital Rules

• Swiss Finance Minister Karin Keller-Sutter strongly opposes a parliamentary committee's proposal to allow UBS to use cheaper hybrid debt for capital requirements.
• The committee suggests UBS back foreign units with 50% equity and 50% Additional Tier 1 bonds, a move the government deems risky for taxpayers.
• The proposal introduces stricter safety triggers for AT1 instruments but faces significant political hurdles in the lower house of parliament.
• UBS estimates the revised rules would still require approximately $13 billion in extra capital, though significantly less than the government's original demand.

Swiss Finance Minister Karin Keller-Sutter has issued a stark rebuke of a legislative compromise designed to soften capital requirements for UBS Group AG. The government's Finance Minister described the parliamentary committee's proposal as favors the bank at expense of Swiss taxpayers. Her criticism marks a significant escalation in the ongoing political battle over how to regulate the nation's largest lender following its emergency acquisition of Credit Suisse. The disagreement highlights a deep fracture between the executive branch, which prioritizes strict financial stability, and the legislative committee, which emphasizes maintaining the bank's global competitiveness.

The parliamentary committee's amended proposal represents a substantial retreat from the government's initial demands. Originally, the government required UBS to fully capitalize its foreign units using 100% Common Equity Tier 1 capital, the highest quality form of bank capital. This stringent measure was calculated to cost the Zurich-based bank approximately $20 billion in fresh equity. However, the committee argued that such a requirement would severely undermine UBS's ability to compete with financial centers that have deregulated. Consequently, the committee passed an amendment allowing UBS to utilize cheaper Additional Tier 1 capital to cover half of the capitalization gap for its foreign subsidiaries.

Why Does The Minister Oppose The Hybrid Debt Proposal?

Finance Minister Keller-Sutter argues that the committee's proposal fails to enhance the safety of the Swiss banking system. She stated that the move creates legal uncertainty and does not improve the financial stability landscape following the collapse of Credit Suisse. Regulators, including the Swiss National Bank and the Financial Market Supervisory Authority, have also viewed the proposal as impractical. The government contends that relying on hybrid debt instruments introduces risks that were exposed during the Credit Suisse crisis, where similar capital instruments were written down.

The minister remains confident that the committee's proposal will not survive the broader legislative process. She noted that a significant minority within the committee preferred a requirement of 90% highest-quality equity capital. Keller-Sutter threatened to reconsider earlier government concessions if a watered-down solution is ultimately passed into law. Her opposition underscores the government's determination to prevent a scenario where taxpayer funds are implicitly guaranteed to cover losses absorbed by hybrid debt holders.

How Will Stricter AT1 Triggers Affect UBS?

To address concerns regarding the reliability of Additional Tier 1 instruments, the committee introduced stricter safety measures into the proposal. If UBS's Common Equity Tier 1 ratio falls below 11%, the bank would be required to halt dividend payments, share buybacks, and reduce bonus payments. Furthermore, coupon payments on the AT1 bonds would be suspended under these stressed conditions. These amendments effectively raise the real cost of holding AT1 capital for UBS, as the debt becomes less attractive to investors during times of financial strain.

Despite the concessions, UBS acknowledges that the committee's proposal still imposes a significant capital burden. The bank estimates it would need to hold approximately $13 billion in extra Tier 1 capital to comply with the new rules. While this is a reduction from the $20 billion originally demanded, it still requires substantial capital allocation that could impact profitability metrics. UBS has historically argued that excessive capital requirements could damage its return on equity and limit its capacity for growth.

What Is The Legislative Timeline And Market Impact?

The legislative process for the banking bill is far from over. The committee's proposal must now proceed to a vote in the upper house during the autumn session, which runs from September 14 to October 2. The outcome remains uncertain as the bill will subsequently face scrutiny in the lower house, where left-leaning lawmakers have already criticized the concessions granted to UBS.

Financial markets reacted negatively to the news of the committee's compromise. UBS shares dropped as much as 3.1% following the announcement, reflecting investor concerns about the regulatory overhang. Analysts at Goldman Sachs noted that even the watered-down regulations would negatively affect the bank's earnings in the near term. The final capital rules are not expected to be fully finalized until the end of 2026 at the earliest, extending the period of regulatory uncertainty for the bank.