Council of States committee softens capital rules for UBS

The Council of States' Economic Affairs Committee decided on Monday to soften the Federal Council's demands on "too big to fail" regulation for UBS. Under the committee's proposal, the bank would have to cover its foreign holdings with 50% AT1 bonds (Additional Tier 1) rather than 100% common equity, as the government had requested. The decision will form the basis for the Council of States' work in the next parliamentary session.

Reactions have been largely critical. The Social Democrats and the Greens argue that little would change for systemically important banks. Finance Minister Karin Keller-Sutter also voiced opposition: "Per il Governo si trattava di trarre gli insegnamenti dalla crisi di Credit Suisse, elaborando una soluzione sostenuta dalla Banca Nazionale Svizzera (BNS), dalla Vigilanza finanziaria, dal Fondo Monetario internazionale e da altri organismi che conoscono bene i rischi dei mercati. Io continuerò a battermi in questa direzione." (For the government, it was about learning the lessons of the Credit Suisse crisis by devising a solution backed by the Swiss National Bank, the financial regulator, the International Monetary Fund and other bodies well versed in market risks. She said she would keep pushing in that direction.)

The capital dispute

Foreign subsidiaries are currently covered by 45% common equity. The Federal Council wants to raise that to 100%; the committee proposes 50%, with the remainder covered by AT1 bonds, which can be converted into equity under certain contractual conditions. Committee chair Eric Ettling (the Centre) says this is not a favour to UBS: "Non è un regalo per UBS, ma un compromesso, anche perché le AT1 diventeranno care e questo verrà a costare parecchio a UBS." (It is not a gift to UBS but a compromise, since AT1 bonds will become expensive and will cost the bank a good deal.) Keller-Sutter counters that the instrument's reliability remains uncertain: "Non lo si sa ancora con esattezza: le perizie da noi commissionate hanno espresso forti riserve e ritengono questa proposta giuridicamente incerta e non necessariamente praticabile." (That is not yet known for certain: the expert opinions she commissioned raised strong reservations and consider the proposal legally uncertain and not necessarily workable.) The minister also rejected accusations, made by some economic law experts, that the committee had bowed to UBS lobbying: she recalled that an attempt to regulate the matter by ordinance after the 2008 financial crisis was already watered down under industry pressure, and said it was now up to Parliament to take responsibility for the decision.

USI professor Edoardo Beretta notes that AT1 bonds can strengthen banks' capital but remain hybrid debt instruments: they offer weaker risk coverage than pure equity, which explains some investor wariness despite the instrument's generally sound reputation.

UBS welcomes the committee's work but remains critical of the actual proposal, which it says would still mean a significant rise in costs for the bank. The group's CEO wrote on LinkedIn that he appreciated the committee's efforts to find an alternative to the Federal Council's demands, which he called extreme, also praising the closer alignment of Swiss AT1 instruments with international practice.

The underlying question remains open: whether the committee's compromise genuinely reduces the risk, for taxpayers, of having to step in should another bank run into trouble, or whether it merely postpones a capital-strength problem that the Credit Suisse crisis had already exposed.