ZURICH, March 26 (Reuters) – Two years after acquiring Credit Suisse to form a Swiss banking giant, UBS is attempting to avoid stricter regulations by proposing to limit the future size of its investment bank and maintain more capital, according to people familiar with the discussions.
The collapse of Credit Suisse in 2023 was a turning point for Switzerland, leaving it with only one global lender and prompting regulators to insist on higher capital reserves to enhance industry safety.
In a memo to staff published on March 19, UBS CEO Sergio Ermotti expressed his thoughts on the regulatory challenges: “I never expected the greatest obstacle to delivering a successful outcome would come from the same authorities who asked us to take on the Credit Suisse challenge.”
UBS generates most of its profits through wealth management, but excessive capital requirements could depress the bank’s shares and make it a takeover target, according to two sources familiar with the lender’s concerns. Its wealth management business could be particularly appealing to competitors such as Morgan Stanley, JPMorgan, Goldman Sachs, and HSBC.
Behind the scenes, UBS is offering regulators assurances to avoid having to provide what it estimates could total over $40 billion in additional capital compared to its position before acquiring Credit Suisse. This amount would be necessary if the bank were required to back its participation in foreign entities with 100% equity instead of the current 60%, as financial regulator FINMA desires.
One potential concession UBS has proposed is capping the investment bank at approximately 30% of its total business, according to two sources familiar with the matter. The division, which trades stocks and bonds and advises companies on deals, is considered riskier due to its direct exposure to market fluctuations.
Excluding non-core and legacy assets, the investment bank accounted for about 21% of UBS’s risk-weighted assets at the end of 2024, allowing some room for growth. In 2008, the division represented nearly two-thirds of such assets when UBS required a government bailout, an experience that influences Swiss public discourse on regulation.
Banking analyst Daniel Bosshard from Luzerner Kantonalbank suggested that a cap of 25% to 30% on the size of the investment banking business might ultimately prove an acceptable compromise for both sides. “However, a solution will not be on the table overnight and will cause uncertainty until then,” he noted.
Another concession involves an offer to strengthen the bank’s capital, though not as much as some politicians desire. UBS estimates that due to the Credit Suisse acquisition and new international rules, it will need up to $19 billion in additional capital. UBS may be willing to add another $5 billion, a fraction of what advocates for strict capital rules, such as FINMA, would prefer.
A UBS spokesperson stated that the bank supports the government’s efforts to enhance financial stability, provided they do not impose disproportionate burdens on the institution. “UBS is already one of the best-capitalized banks globally,” the spokesperson emphasized.
In May, the government will estimate how much additional capital UBS should hold under the new rules, although the final approval process for the regulation could extend until 2028 or beyond, officials say.
Meanwhile, UBS is evaluating all possible scenarios, including relocating its headquarters, though it has no plans to leave Switzerland.
Last month’s government decision to assign parliament responsibility for the new rules opened the door for UBS to lobby lawmakers into softening regulation, even as the industry raises the threat of the bank’s potential disappearance.
Franziska Ryser, a lawmaker from the centre-left Green Party, rejected the idea that the regulatory overhaul could lead to the bank’s departure. “There won’t be demands made leading to these consequences. This will all be discussed calmly and a suitable solution will be found,” she told Reuters. “Extreme rules won’t be set.”
— news from Reuters