UBS secures softer capital rules, saving hundreds of millions annually

The Swiss Ständerat has approved a compromise on UBS’s capital requirements, allowing the bank to use AT1 bonds for up to half of its core capital needs. This shift could save the bank hundreds of millions of dollars annually, reducing its reliance on costly hard-core capital (CET1) and easing financial pressure ahead of stricter post-Credit Suisse reforms. The decision follows a contentious debate over whether UBS must fully back its foreign subsidiaries with CET1, which the bank argued would limit its ability to fund growth and shareholder returns. The Swiss government initially proposed mandatory CET1 coverage, but the Ständerat’s Economic Affairs Commission proposed a 50-50 split between CET1 and AT1 bonds—a move seen as a victory for UBS by analysts like Filippo Alloatti of Federated Hermes. The compromise aims to prevent another systemic risk like that seen after Credit Suisse’s collapse in 2023, while preserving UBS’s competitiveness. Under the new rules, if UBS’s core capital ratio falls below 11%, it would face stricter penalties, including halted dividend payments and bonus cuts. Recovery would require fresh capital or converting AT1 bonds into equity within six months. Critics, including the Swiss National Bank, question whether AT1 bonds will reliably absorb losses in a crisis, though the proposal aligns AT1 standards more closely with EU and UK frameworks. First issuance of such bonds could take months or years, but analysts expect a modest premium—around 25 to 50 basis points over current AT1 yields—yielding roughly 7% total return, compared to CET1’s 9–10% cost. While investors initially may demand higher yields, market experience suggests eventual acceptance. The Ständerat is expected to vote on the measure on September 17; further resistance could arise in the Nationalrat.