The Swiss Parliament’s upper house has postponed until next week a vote on new banking rules being prepared for UBS following the 2023 collapse of Credit Suisse.
The latest development adds a new chapter in the faceoff between the financial biggie and the European country’s government, in which the Federal Council is pushing to tighten Swiss banking legislation in response to the demise of Credit Suisse, which UBS acquired in 2023.
While the upper house was expected to vote on Thursday on the new rules, the debate went on for so long that the chamber’s president, Stefan Engler, said the session would be interrupted and scheduled the voting for next Wednesday.
The Guy Parmelin administration has argued stricter rules are necessary to protect taxpayers against the risk of another banking meltdown. UBS, on the other hand, has resisted it, calling the intervention excessive, which would undermine the bank’s international competitiveness.
The Federal Council’s proposals for the banking overhaul would require UBS to hold an extra USD 20 billion in Common Equity Tier 1 capital.
The higher capital demands would require UBS to fully back its foreign units with 100% Common Equity Tier 1 (CET1) capital.
However, in August, an upper house committee passed a compromise that could let the bank use USD 13 billion in so-called Additional Tier 1 capital instead.
Investors have hailed the watered-down version of the reform package, stating that UBS could end up saving hundreds of millions of dollars a year, subject to lawmakers approving the alternative proposal for Additional Tier 1 bond use.
Although the current proposal being considered in parliament would tighten existing rules for AT1 bonds, investors don’t see the fallout as being as costly as the Parmelin government’s original plan.
UBS has been in conflict with the government, particularly with Finance Minister Karin Keller-Sutter, who suggested that the institution should maintain approximately USD 20 billion more in CET1 capital to fully support its foreign units.
AT1s are a form of regulatory capital ranked just below CET1. While CET1 absorbs losses immediately, AT1 bonds can be written down or converted into equity in a financial crisis.
“The proposal to use 50% core capital and 50% AT1 bonds is a victory for UBS,” said Filippo Alloatti, head of financials on the credit team at investment company Federated Hermes, which holds UBS AT1 bonds.
“It would be an irony of history if Switzerland gave AT1 bonds a greater role even though it concluded that the instruments are not crisis-proof,” he told Reuters.
The write-off of 16 billion Swiss francs (USD 19.6 billion) in Credit Suisse AT1 bonds helped UBS to take over its old rival. However, it didn’t end well for the stricken bondholders, who have since then engaged in a legal campaign to recover the losses.
While a section of UBS’ investors says AT1 bonds would help stabilise banks in difficulty, the Swiss regulators have termed the mechanism not as secure as CET1 capital.
UBS said the committee’s proposal would provide more clarity on how AT1 instruments operate and bring Switzerland into closer alignment with European Union and British standards.