Swiss Government Proposes Tough New Capital Rules in Major Blow to UBS

$26 Billion Capital Boost Mandated for UBS

The Swiss government has unveiled stringent new capital regulations that would require UBS, the country’s largest banking institution, to hold an additional $26 billion in core capital. The decision comes on the heels of UBS’s 2023 emergency acquisition of troubled rival Credit Suisse.

The proposed measures, announced on Friday, aim to strengthen the bank’s financial resilience. These new requirements mean UBS will also need to fully capitalize its foreign subsidiaries and may have to scale back on share buybacks.

Support from Swiss National Bank and Government Officials

The Swiss National Bank (SNB) threw its weight behind the new rules, emphasizing that they would “significantly strengthen UBS’ resilience”. A government statement noted that the increase in the “going-concern” capital requirement would be met by raising up to $26 billion in Common Equity Tier 1 (CET1) capital. Additionally, UBS would reduce its AT1 bond holdings by around $8 billion.

Swiss Finance Minister Karin Keller-Sutter highlighted the upside of these changes: “The bank will become more stable and attractive in areas such as asset management.” However, she acknowledged that the cost of expanding internationally will rise.

UBS Pushes Back Against “Extreme” Measures

UBS responded cautiously to the announcement, stating that while it supports many of the proposed changes “in principle,” it strongly disagrees with the “extreme” increase in capital requirements. Based on its Q1 results, UBS estimated it would need to hold around $42 billion in additional CET1 capital in total if the new rules are implemented as proposed.

Despite the pushback, the bank reaffirmed its goal of delivering a 15% return on CET1 capital and maintaining previously communicated capital return plans for the year, including dividends and buybacks.

“UBS will actively engage in the consultation process… to evaluate alternatives and solutions that lead to a reasonable cost/benefit outcome,” the bank said. It also pledged to explore options to mitigate negative impacts on shareholders.

Analysts See Room for Negotiation and Long Lead Time

Johann Scholtz, a senior equity analyst at Morningstar, described the announcement as “as bad as it will get for UBS.” However, he pointed out that the bank now has a chance to negotiate concessions and deploy internal strategies to lessen the blow, such as upstreaming excess capital from subsidiaries.

Similarly, analysts at JPMorgan, led by Kian Abouhossein, emphasized the extended implementation timeline—a six- to eight-year runway. They expect full implementation by 2033 at the earliest, with the final rules likely to be settled by 2027.

JPMorgan also noted UBS’s robust financial performance, projecting $12 billion in annual profits and approximately $3 billion in dividends, suggesting the bank can meet its capital targets without halting shareholder returns.

“Too Big to Fail” Debate Rekindled

The Swiss government’s regulatory tightening follows UBS’s controversial takeover of Credit Suisse, a move prompted by the latter’s years of scandals and mismanagement. The collapse of Credit Suisse also led to criticism of Swiss regulator FINMA, particularly regarding its oversight and timing.

Now, with UBS’s balance sheet exceeding $1.7 trillion—double Switzerland’s GDP—regulators argue that extra safeguards are essential to protect the national economy. UBS, however, disputes the “too big to fail” label and warns that excessive capital requirements could undermine its global competitiveness.

Capital Rules Could Impact Lending, Shareholder Returns

A key concern among analysts is how the proposed rules could impact UBS’s balance sheet and lending activity. Higher capital requirements typically raise a bank’s funding costs and discourage lending, reducing the overall risk appetite.

For shareholders, there’s potential impact on discretionary capital—which includes dividends, stock buybacks, and bonus payments. Scholtz previously noted that any cost savings from winding down Credit Suisse’s legacy businesses may be offset by tighter regulations.

“Such measures may place UBS’s capital requirements well above those faced by rivals in the United States,” Scholtz warned, suggesting that this could hinder UBS’s efforts to close its valuation gap with competitors. UBS has also lost its long-standing premium valuation status over other European banks.

Broader Context: Trade Tensions and Market Shifts

The timing of the new capital rules also coincides with broader market challenges. White House tariffs are already impacting UBS’s U.S.-centric wealth management business, and the bank recently lost its title as Europe’s most valuable lender by market cap to Spain’s Santander.

The combination of tighter domestic regulation, international headwinds, and changing market dynamics poses a major test for UBS as it attempts to balance financial resilience with profitability and growth.