UBS: Council of States committee eases federal government's capital plan

The Council of States' Committee for Economic Affairs and Taxation decided on Monday to amend the federal government's bill on systemically important banks, which today applies only to UBS. The government's text required foreign holdings to be covered entirely, 100%, with common equity tier 1 capital (CET1). The committee chose a less burdensome path instead: half of the coverage could come from AT1 bonds (Additional Tier 1).

AT1 bonds offer a higher yield than other debt instruments. In exchange, they can be converted into equity or written down to zero if the bank runs into trouble, as happened with Credit Suisse.

The decision was taken ten votes to two, after a long debate. The meeting was attended by Federal Councillor Karin Keller-Sutter, head of the Federal Department of Finance, and Daniela Stoffel, who heads the State Secretariat for International Finance.

A compromise, not a gift

The committee's president, Erich Ettlin (Centre/OW), rejected the idea that the decision favours UBS: "Si tratta di un compromesso e non di un regalo a UBS" (This is a compromise, not a gift to UBS). Ettlin added that buying AT1 bonds still costs the bank money, even though the committee was unable to quantify how much.

UBS had strongly opposed the government's proposal. The coverage currently required for foreign holdings is 60%, a level that both the government and the committee consider too low.

Ettlin explained the choice with a twofold goal: "Vogliamo rafforzare le regole per proteggere meglio i contribuenti, ma anche per garantire che l'economia non sia soggetta a un eccesso di regolamentazione" (We want to strengthen the rules to better protect taxpayers, but also to ensure the economy is not subject to excessive regulation). That statement sums up the core issue of the too-big-to-fail dossier: how much extra capital is needed to stop a bank rescue from falling on taxpayers again, and how much that extra capital weighs on the competitiveness of a bank operating on a global scale.

The committee did not, however, have time to examine the mechanism for state liquidity guarantees, another piece of the reform launched after the collapse of Credit Suisse. The dossier now moves to the federal chambers, where the government's stricter line and the committee's softer one will need to be reconciled into a final solution.