Switzerland's Finance Sheriff Takes on UBS and Banking Elite

In the serene, consensus-driven world of Swiss finance, a new sheriff has arrived in town. Stefan Walter, a 60-year-old German citizen with decades of experience in top-level regulation, has taken the reins of Switzerland’s financial regulator, Finma, and is shaking things up. Known as "The Sheriff," Walter is using a tumultuous period in Swiss finance to establish a forthright, public presence for Finma that few in Zurich or Geneva are accustomed to. His approach is a stark contrast to the cozy, consensual atmosphere that characterized the years leading up to Credit Suisse’s collapse in 2023.

Walter’s tenure has been marked by a series of high-profile penalties and investigations against banks and fintech firms, including Julius Baer Group Ltd. Under his watch, Finma has communicated penalties or investigations against seven banks and fintech firms, using the limited powers that the body has to the full. Most conspicuously, he’s publicly pushed for the strictest possible stance on the future capital requirements for UBS Group AG, facing off against the bank in a showdown where the stakes are rising rapidly. Executives at the global wealth manager in Zurich are even exploring whether the full introduction of the higher requirement could compel them to move their headquarters out of the country altogether.

The push for higher capital requirements centers around the capitalization of UBS’s foreign units, which, according to Finma and the Swiss National Bank, ought to be backed 100% by equity of the parent bank. UBS, which bought its rival for just $3 billion two years ago, has said that this is an overreaction to the crisis at its former rival, and is lobbying strongly against it. But a larger issue is also at stake. Switzerland’s status as a safe haven for the world’s wealthy has been called into question by the Credit Suisse crisis, and politicians also worry that the new combined bank is simply too large — twice the size of the domestic economy. Current geopolitical turmoil and gyrating markets should put a premium on Swiss experience in managing money — yet the financial center is at risk of losing ground to the likes of Singapore and Dubai.

Walter’s arrival in the first place was seen as a way to address this risk and maintain Switzerland's competitive edge in the global financial sector. Known since his time at the European Central Bank, from 2014 to 2024, as a tough interlocutor with the likes of Deutsche Bank AG and embattled German regional lender Nord LB, he helped rebuild confidence in the region’s financial sector following the sovereign debt meltdown. Previously, as the secretary general of the Basel Committee on Banking Supervision from 2006 to 2011, he was also a pivotal figure in forging the post-crisis global bank reforms that triggered a step change in banks’ capital requirements. Before that, he spent more than a dozen years at the Federal Reserve Bank of New York in various roles.

That track record informed Finance Minister Karin Keller-Sutter’s view that he is a good choice to run the regulator, according to an official familiar with the matter. His lack of familiarity with the established Swiss ways of operating was seen as an advantage. Walter’s sometimes-abrupt manner and unexpected demands raised laughs at first among some bankers more used to Swiss politeness — but he now inspires a combination of animosity and respect.

The potential long-term effects of the increased capital requirements for UBS, as proposed by Stefan Walter, could be significant for the bank's global operations and its competitive position in the international financial market. According to the information provided, UBS is facing an increase in capital requirements of as much as $25 billion. This substantial increase is part of a revamp of the country’s financial regulation led by Finance Minister Karin Keller-Sutter after the demise of Credit Suisse. The push centers around the capitalization of UBS’s foreign units, which, according to Finma and the Swiss National Bank, ought to be backed 100% by equity of the parent bank.

One of the most immediate concerns is that UBS executives are exploring whether the full introduction of the higher requirement could compel them to move their headquarters out of the country altogether. This potential relocation would have far-reaching implications for UBS's operations and its standing in the global financial landscape. Moving the headquarters could disrupt the bank's established networks and relationships in Switzerland, potentially leading to a loss of talent and expertise that has been cultivated over decades.

Moreover, the increased capital requirements could strain UBS's financial resources, diverting funds that could otherwise be used for expansion, innovation, and competitive initiatives. This financial burden could limit UBS's ability to invest in new technologies, acquire other financial institutions, or expand into emerging markets, thereby weakening its competitive position against other global financial giants.

Additionally, the heightened capital requirements could affect UBS's risk management strategies. With more capital tied up in equity, the bank might become more risk-averse, potentially missing out on lucrative investment opportunities that could drive growth and profitability. This conservative approach could further erode UBS's competitive edge in a dynamic and rapidly evolving financial market.

Furthermore, the increased capital requirements could impact Switzerland's status as a safe haven for the world's wealthy. The Credit Suisse crisis has already called this status into question, and the new combined bank, which is twice the size of the domestic economy, is seen as a potential risk. If UBS is forced to relocate or significantly alter its operations due to the capital requirements, it could further undermine Switzerland's reputation as a stable and reliable financial center.

In summary, the increased capital requirements proposed by Stefan Walter could have profound long-term effects on UBS's global operations and competitive position. These effects include potential relocation of headquarters, financial strain, reduced investment in growth initiatives, and a more risk-averse approach, all of which could weaken UBS's standing in the international financial market and impact Switzerland's reputation as a financial safe haven.