Swiss legislators are edging toward a compromise on Additional-Tier-1 (AT1) capital instruments that could reduce the cost for UBS to meet a proposed $20 billion capital requirement imposed by the government. The Senate’s Economic Affairs and Taxation Committee next meets on Monday to review reforms targeting AT1 bonds, which function as contingent convertible debt designed to absorb losses before a bank’s capital falls below regulatory thresholds.
The debate centers on whether AT1 instruments can be activated earlier in a crisis to stabilize a distressed bank, rather than only during resolution. A study commissioned by UBS and published in June, co-authored by University of Basel professors Yvan Lengwiler and Corinne Zellweger-Gutknecht, proposed a two-stage mechanism: an initial phase suspending coupon payments and dividends if capital ratios fall below requirements, followed by a voluntary conversion of AT1 bonds to equity if conditions worsen. The paper was presented to the committee ahead of a planned vote originally scheduled for this month, now postponed to August 31.
UBS has not publicly specified its preferred outcome but has signaled broad support for strengthening AT1 instruments, provided they align with international standards. The bank accounts for roughly 7% of the $286 billion European AT1 market and has a vested interest in shaping rules that balance loss-absorption with cost efficiency. The government’s original proposal—requiring full capital backing for foreign subsidiaries—has drawn criticism from UBS executives, who argue it would place the bank at a competitive disadvantage.
The Credit Suisse collapse in 2023 exposed weaknesses in AT1’s role, as $17 billion of the bank’s AT1 bonds were written down only after its rescue by UBS, triggering legal challenges and widening spreads on Swiss AT1 debt. Finance Minister Karin Keller-Sutter has indicated the government will await global consensus before endorsing domestic reforms, leaving the integration of Swiss AT1 rules with international frameworks unresolved.
Committee Chairman Erich Ettlin emphasized the need for internationally accepted AT1 instruments, warning that without global alignment, such debt would be ineffective. The political process is unlikely to conclude before 2025 due to the complexity of the proposals and limited scope for further parliamentary review. Alternative solutions under consideration include lowering the percentage of capital requirements UBS must cover with equity, though the committee could also reject AT1 reforms entirely.
