UBS must fully back foreign units with top-tier capital, Swiss central bank says

Three years after Credit Suisse imploded and forced one of the more uncomfortable shotgun weddings in banking history, Swiss regulators are still recalibrating the guardrails. The Swiss National Bank’s Vice President Antoine Martin said on August 26 that UBS must fully back its foreign subsidiaries with high-quality Common Equity Tier 1 capital held in Switzerland, a statement that lands with real weight given what the SNB estimates it would cost the bank to comply.

The price tag, according to authorities: roughly $20 billion in additional CET1 capital.

What the SNB is actually asking for

Right now, UBS backs its foreign participations with somewhere between 45% and 60% CET1. The Federal Council formally proposed closing that gap on April 22, with the goal of taking coverage from a majority to full, 100% backing.

The SNB estimates that if the reform had applied from January 1 of this year, UBS would have faced a shortfall of around $9 billion. Full implementation going forward would require approximately $20 billion more in qualifying capital.

Martin acknowledged the competitiveness concern directly, pointing to well-capitalized US banks as evidence that carrying thick capital buffers doesn’t necessarily impair a bank’s ability to perform.

The Credit Suisse shadow

The specific vulnerability that regulators are now targeting is the parent-subsidiary dynamic. When a foreign unit of a global bank comes under pressure, the parent company’s ability to ring-fence or divest that unit without triggering a wider collapse depends heavily on whether the parent holds sufficient liquid, high-quality capital against it. If the parent has been using lower-quality instruments or simply hasn’t set aside enough, a subsidiary in distress can become a contagion event rather than a contained one.

Parliament is set to take up the matter around August 31, making this a live legislative conversation, not a distant consultation paper.

One compromise being discussed would allow UBS to satisfy up to half of the new CET1 requirement using Additional Tier 1 bonds, commonly called AT1s. AT1 bonds sit below CET1 in the capital hierarchy; they convert to equity or get written down when a bank’s capital falls below certain thresholds. The Credit Suisse saga had a notable AT1 chapter of its own, with roughly $17 billion in Credit Suisse AT1s written to zero as part of the rescue, an outcome that rattled the entire AT1 market globally.

Whether Swiss regulators ultimately accept AT1s as a partial substitute for CET1 will matter considerably to how much strain the new rules place on UBS’s capital structure and, by extension, its ability to return capital to shareholders.

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