UBS faces tougher rules in Swiss response to Credit Suisse rescue

The government, which aims to put the measures into effect quickly and present two packages for implementation in the first half of 2025, rejected the idea of putting into law the option for temporary public ownership of a bank in crisis and Keller-Sutter said taxpayers should not be on the hook. The report floated giving extra powers to Swiss market regulator FINMA, the possibility of applying capital surcharges and strengthening the financial position of subsidiaries, but shied away from a "blanket increase" in capital requirements.

Switzerland's UBS and three other systemically relevant banks must face tougher capital requirements, the Swiss government said on Wednesday, in an effort to shield the country from a repeat of the collapse of Credit Suisse. The Swiss government pitched 22 measures for direct implementation in 209 pages of recommendations on how to police banks deemed "too big to fail" (TBTF). It stopped short of saying how far stricter capital requirements should go.

"This is firstly about having additional preventative measures so that a bank can't even get itself into the kind of hopeless situation we saw with Credit Suisse," Swiss Finance Minister Karin Keller-Sutter told a press conference. Switzerland's plan will come under close scrutiny at home and abroad because if UBS were to unravel, there are no local rivals left that could absorb it. A bailout and nationalisation would likely cause serious damage to public finances.

At around $1.7 trillion, the UBS balance sheet is now double the size of Switzerland's annual economic output, giving it an exceptional weight for a major economy. "The quantitative and qualitative capital requirements for systemically important banks should be tightened in a targeted way and supplemented with a forward-looking component," the government's report said.

The increase in requirements for UBS will be "substantial, especially if UBS were to retain its current size and structure, or even grow," it added. UBS declined to comment on the report. UBS shares fell 2.7% on Wednesday after it dropped as much as 4% and trading was briefly halted. The stock is still up by about 58% since it took over Credit Suisse in a government-backed rescue last year. The Stoxx Europe 600 Banks Index has gained about 37% in the same period.

The Credit Suisse takeover was the biggest merger of banks of systemic importance since the 2007-9 financial crisis and Swiss banking culture is under scrutiny. The lower house of parliament last month backed a motion to claw back pay from senior managers if banks are rescued by public money. Keller-Sutter said on Wednesday that the government would disincentivise reckless corporate behaviour and excessive bonuses, and take steps to ensure they can be clawed back.

The finance minister criticised excessive banker pay and said she would have to work for 30 years to earn the equivalent of UBS Chief Executive Sergio Ermotti, who last year received a package worth 14.4 million Swiss francs ($15.8 million). UBS declined to comment on Keller-Sutter's remarks. The government, which aims to put the measures into effect quickly and present two packages for implementation in the first half of 2025, rejected the idea of putting into law the option for temporary public ownership of a bank in crisis and Keller-Sutter said taxpayers should not be on the hook.

The report floated giving extra powers to Swiss market regulator FINMA, the possibility of applying capital surcharges and strengthening the financial position of subsidiaries, but shied away from a "blanket increase" in capital requirements. "It is difficult to reach a final judgement on the exact impact of increased capital requirements," it said, noting that they should factor in "proportionality" given competitive pressures facing Swiss banks.

FINMA welcomed the proposals, many which had been on its wishlist following the crisis, including the introduction of a senior managers regime to make executives more accountable. "FINMA also supports the strengthening of the legal basis so that it can communicate openly and impose fines," it said.

Analysts have forecast UBS might have to find billions of extra dollars, but the process is likely to take time as the government said it would wait on the findings of a parliamentary investigation into Credit Suisse's demise. Those are not due until near the end of 2024.

UBS, Raiffeisen Group, Zürcher Kantonalbank and PostFinance are deemed systemically important lenders in Switzerland. "With capital adequacy regulations very slightly tightened, shareholders assume a slightly larger, but still very small, share of risk," said Adriel Jost, economist and former adviser to the Swiss National Bank's governing board.

Jost added that easier access to liquidity through the SNB and the public liquidity backstop could "increase the subsidies" available to UBS in the event of a crisis. INTERNATIONAL CONCERN

In the lead up to the report, international organisations raised concerns over the UBS mega-merger and its aftermath, including the IMF and the OECD. The Financial Stability Board, a global financial watchdog, has also cautioned Switzerland about the risks of UBS failing.

The FSB is set to review its ranking of UBS among the list of global systemically important banks after the Credit Suisse takeover, which is due to close later this year. Moving up a notch would lead to higher capital demands. The Swiss lower house last year backed a motion calling for systemically relevant banks to have a leverage ratio of 15% of assets, far more than in the EU, the U.S. or Britain.

Analysts do not expect such tough terms to be imposed on UBS, which currently has a common equity tier 1 ratio of 14.5%, or $79 billion, equating to a leverage ratio of 4.7%. Higher capital requirements could force UBS to shrink its balance sheet and reduce credit supply, experts say, while UBS executives have warned that excessive capital requirements would ultimately hurt the consumer.

Keller-Sutter said last year that tougher capital requirements were coming, but also that it was important not to hurt Switzerland's ability to compete with financial centres like New York, London, Singapore and Dubai. (Additional reporting by John Revill; Writing by Dave Graham; Editing by Alexander Smith)

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