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Swiss Committee Backs Softer UBS Capital Plan Using AT1 Debt
Swiss lawmakers are deciding how much extra financial protection UBS must keep.
The government wants UBS to hold about $20 billion more capital.
A committee suggested that up to half of this amount could come from a special kind of debt called AT1.
This debt can help absorb losses when a bank is in trouble.
The committee wants AT1 debt to activate earlier during a crisis.
If UBS falls below its safest capital level, it could not pay dividends, buy back shares, or pay AT1 interest.
Its bonus pool would also be reduced.
UBS says stricter rules could make it less competitive.
The proposal is not final and could still be changed by Parliament.
A Swiss upper-house committee voted 10-2 to let UBS use reformed AT1 debt for up to 50% of additional capital requirements.
The proposal addresses a government plan requiring UBS to hold roughly $20 billion more capital to protect its Swiss operations.
UBS has argued that the proposed requirements could make it less competitive, while debt funding would generally cost less than equity.
The committee’s plan would require UBS to back the value of its foreign units with a combination of equity and AT1 debt.
The proposal still faces a lengthy legislative process, including an upper-house vote scheduled for September 14 to October 2 and possible opposition in the lower house.
- Who
- UBS Group AG, the Swiss government, and Swiss lawmakers, including the upper-house Economic Affairs and Taxation Committee.
- What
- The committee endorsed allowing UBS to use reformed AT1 debt for up to 50% of an additional capital requirement.
- Where
- Switzerland, involving UBS’s Swiss operations and its foreign subsidiaries.
- When
- The committee voted on Monday; an upper-house floor vote is scheduled for the autumn session from September 14 to October 2, with legislation expected to continue until at least next year.
- Why
- The government seeks to make UBS more resilient after Credit Suisse’s collapse, while UBS argues that the proposed capital increase could undermine its competitiveness.
Softer Capital Approach
Stricter Capital Approach
Use of AT1 debt
Softer Capital Approach
The committee supports allowing reformed AT1 instruments to cover up to half of the additional capital requirement, giving UBS more flexibility and relying partly on generally cheaper debt funding.
Stricter Capital Approach
The Swiss Finance Ministry has criticized AT1s as less reliable than the highest-quality equity for absorbing losses during a crisis.
Impact on UBS
Softer Capital Approach
UBS and the Swiss Bankers Association argue that stricter capital requirements could hurt the bank’s competitiveness; the association welcomed AT1 reforms while rejecting the tougher requirement.
Stricter Capital Approach
Supporters of the tougher approach want UBS to hold more protection around its foreign subsidiaries so problems abroad cannot threaten its Swiss entity.
Political outlook
Softer Capital Approach
Committee President Erich Ettlin said the proposal would serve Switzerland and was not a victory for UBS.
Stricter Capital Approach
The Social Democrats criticized the committee’s position, and lawmakers in the more left-leaning lower house could reverse some concessions.
Key facts
- Committee vote
- 10-2 in favor, with one abstention
- Proposed AT1 share
- Up to 50% of the additional requirement, subject to reforms
- Estimated extra capital
- About $20 billion
- Capital purpose
- Help ensure UBS’s foreign businesses cannot endanger its domestic entity
- Stress measures
- Dividend payments, share buybacks, and AT1 coupons could be barred if UBS falls below its minimum CET1 requirement
- Additional consequence
- UBS’s bonus pool would be reduced under the proposal
- Next legislative step
- An upper-house floor vote during the September 14–October 2 autumn session
Quotes
Joseph Dickerson and Theo Massing
Jefferies analysts commenting on the committee’s recommendation
“The committee has backed a materially softer approach. The result would enable UBS to have more flexibility around how it meets the Swiss government’s demand to back foreign subsidiaries.”
livemint.com
Sources
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