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Back in his college days, UBS chair Colm Kelleher used to enjoy playing Diplomacy, a negotiation-based board game that is notorious for ruining friendships. Those old skills might come in handy as his bank fights to avoid being saddled with up to $26bn in new capital requirements.
Switzerland’s Federal Department of Finance has proposed a suite of measures to avoid a repeat of the 2023 collapse of Credit Suisse. Central among them, systemically important banks must keep more equity capital free to absorb future losses. That might sound reasonable. UBS, now Switzerland’s only remaining systemically important bank, thinks it goes too far.
The main bone of contention: the FDF plan would change how UBS accounts for its holdings in foreign subsidiaries. Based on the current regime, the parent bank must only hold capital equivalent to about 60 per cent of the value of those investments. Under the new proposal, it would have to back them fully. A government-commissioned study estimated it would push UBS group’s core equity tier 1 ratio as high as 19 per cent, far greater than its international peers.
The ministry says its approach aligns with international regulations and it does not want to “negotiate”. UBS, meanwhile, says the extra capital would hamstring its ability to compete. But diplomacy, in real life as well as in the board game, often involves exaggeration. The truth lies in between.
For one, the FDF’s new suggestions are not as “extreme” as UBS makes out. The Credit Suisse debacle showed that the existing rules were not fit for purpose. Smaller economies such as Switzerland need stricter checks than elsewhere since they can less afford to bail out a massive global bank.
But UBS is right that the government is trying to swing from an unusually lax set-up to an unusually tough one. The Basel Framework, the benchmark for global banking standards, recommends an approach like the one the FDF suggests, but includes the option to leave things as they are for small investments, or a fraction of larger ones. The EU does this; Switzerland could too, without abandoning its goal of improving safety.
UBS could also take a leaf from its US peers — including Kelleher’s former employer Morgan Stanley — which successfully neutered new capital rules known as the “Basel Endgame” by arguing they would trash the economy. The Swiss government’s own report highlighted risks to employment and credit availability. Overcompensating after a crisis is a real danger: the British government is at present rushing to unwind regulations in an effort to boost economic growth.
UBS’s shares have whipsawed since the proposals were put forward. Kelleher and UBS chief executive Sergio Ermotti told staff in a memo that they were readying themselves for a long battle. But at least they can see what the worst would look like. And if diplomacy prevails, there is room and reason to meet in the middle.
