It is about more than UBS, it is about Switzerland," says UBS CEO Sergio Ermotti before the showdown in Bern
On Wednesday, the Council will vote on how much capital the UBS must hold in the future. The capital issue marks a turning point for the large bank. The CEO Sergio Ermotti shows how alarmed he is with the arguments being made in the debate. In an interview with the NZZ, he tries to create clarity.
Question: Mr. Ermotti, you have been UBS CEO again for over three years. Today you give us the first interview, on a Saturday. Why now?
Answer: Regarding the banking regulation that the Council is currently discussing, it is in fact a Lex UBS, as it only concerns us. Numerous misunderstandings and incomplete representations are circulating in the debate. This causes confusion among the authorities. I want to create clarity here.
Question: The Council will vote on Wednesday on how much capital the UBS must hold in the future. What is the worst-case outcome for you?
Answer: If what is on the table today is implemented: a subordination of the subsidiaries with 90 or 100 percent hard equity. The difference between the two proposals is minimal and does not change the fundamental problem: this regulation is not targeted, proportional, or internationally coordinated. It also does not bring a solution to the problems that led to the downfall of Credit Suisse. That is the crucial point for me: they want to prevent a bank from ever entering a crisis like the CS again, but the answer ignores the true causes of the CS crisis.
"We are aware that there will also be some tightening of capital. The UBS cannot get by without it."
Question: Finance Minister Karin Keller-Sutter proposed that the UBS must subordinate its subsidiaries in the head office to 100 percent hard equity in the future. Currently, this is 45 percent. The Council now proposes 90 percent as a compromise. They call this the worst-case solution. Apparently, the Council members did not understand the position of the UBS.
Answer: Some have understood the position of the UBS, others do not want to understand it, and others are confused. This is understandable, after all, we are having a very technical discussion here. The presentation by the authorities is sometimes shortened and misleading. It is doubly difficult for us to correct this. We not only have to correct the facts, we also fight for the fact that the authorities generally enjoy greater credibility than a private company. People assume that the facts stated by the authorities are correct. Unfortunately, this is not always the case.
Question: Where do you see the biggest mistake in the debate?
Answer: Just as the authorities, we also believe that we must draw the right lessons from the Credit Suisse crisis. But these do not only concern the weaknesses in the business model and management failure, but also the role of the supervisory authorities. Credit Suisse could only survive so long because it granted extensive concessions and exceptions to the financial market supervision. The National Bank ignored the problems; in its annual report on financial stability, there is no word about the fact that the CS was in a very difficult situation since at least 2019. The new regulation addresses these problems by preventing a bank from receiving exceptional provisions. We fully support this. However, we reject the stricter capital requirements. We consider them unnecessary if the supervisory authorities consistently enforce the current regulation in the future. Furthermore, a full write-down would obscure a worsening capital situation until the end. We are aware that there will also be some tightening of capital. The UBS cannot get by without it.
Question: What do you mean by that?
Answer: The debate is so emotionally charged that it is clear that we have to pay a political price. We consider this unjustified, but this is the reality. The question is: what is still acceptable, and what is excessive? To stay in the picture: we can live with two blue eyes, but two blue eyes and a broken nose are too much. This is what the demand for a 90 or 100 percent capital subordination is all about.
Question: Where is your breaking point?
Answer: You know that I cannot name a percentage for the capital requirements. If I did and the political solution ended up in this area, it would mean that politics has buckled and has done what they dictated to the UBS. This shows how far we have moved away from a reasonable and fact-based discussion. The starting point is now: the UBS against the rest. In such a situation, it is extremely difficult to keep a cool head and find rational solutions.
Question: Where do you see such a solution?
Answer: Our Chairman of the Board, Colm Kelleher, said this on Thursday at the Bank Day in St. Gallen. With the proposal of the Council Commission, we would have to hold 13 billion dollars in additional Tier-1 capital – forever. Are we happy with that? No, we are not. We helped in the rescue of the CS, saving Switzerland from a reputation-damaging debacle. The UBS was part of the solution. But that is politics. That is the blue eye. It is still a blow, but it is bearable.
Question: You are talking about the proposal of the advisory Council Commission. It wants the UBS to subordinate its subsidiaries in the head office to at least 50 percent hard equity and up to 50 percent AT1 bonds. In the debate, this is the proposal that comes closest to the UBS. Why are you even talking about a blue eye here?
Answer: Because we also have to build up 13 billion dollars in additional core capital with this proposal. The annual additional costs from the CS acquisition would amount to 2 billion dollars. 2 billion every year.
"Additional capital acts like a tax. The economic location of Switzerland will also bear some of the costs. Customers and employees will also be affected."
Question: Many accuse you of having received the CS at a bargain price.
Answer: That is nonsense. Our shareholders have raised 15 billion dollars since the acquisition for the recapitalization and restructuring of the CS. In addition, we will regain the return on capital that the UBS achieved in 2022 by the end of this year at the earliest.
Question: Where is the price of two blue eyes and the punch to the face?
Answer: 3 billion annually. That would cost us the proposal of the Federal Council. The 90 percent proposal is similarly expensive.
Question: The layman says that a bank that holds more capital is safer, which protects taxpayers in crises. Why should the ordinary citizen be interested whether the UBS gets one or two blue eyes?
Answer: Because the economic location of Switzerland will also bear some of the costs. Additional capital acts like a tax. If the taxes rise, we pay more to bring our products to market. It is a mistake to believe that the additional costs are borne only by the shareholders. Customers and employees will also be affected. We will have to do everything to achieve a comparable return as our competitors. Because we are in competition for customers and capital.
Question: The UBS is above all an asset manager. Its clients want security.
Answer: That is only half the truth. We are not only an asset manager, but also the largest universal bank in Switzerland. More than 200,000 Swiss companies and about 3 million private individuals are our customers, and we grant loans of around 350 billion francs.
"For me and for the Board of Directors, it is not when I leave, but how strong the UBS is that I leave behind."
Question: President Kelleher also said in St. Gallen that he hopes for a constructive compromise that allows the UBS to stay in Switzerland. This means that the question of whether Switzerland is still the right location for the UBS also depends on the question of capital?
Answer: We have always said that we want to continue operating in Switzerland as a globally competitive bank. We are convinced that this is a win-win situation for both the UBS and Switzerland. That is why we are so strongly committed to the cause. I myself do not see the problem with our size, which critics keep bringing up. The UBS is, for example, in the top 20 of the world's largest banks, Switzerland is in the same position among economies. Switzerland does not want to be in all areas the best and at the same time simply exclude all risks.
Question: You took on the job at the top of the UBS with the mandate to integrate the CS. The integration is complete by the end of the year. Has your mandate changed? Do you remain CEO until the capital issue is resolved?
Answer: My resignation is not currently an issue. What is central for me and for the Board of Directors is not when I leave, but how strong the UBS is that I leave behind.
Question: Does this affect the regulation?
Answer: This affects the entire positioning of the bank for the future. So also: Where are we in fifteen or twenty years? In what direction are we going? It would be too much to say: I resign, I have done my homework. But now is not the right time. The current situation is as decisive as that in March 2023.
Question: Do you see the UBS again at a turning point like with the collapse of the CS?
Answer: Yes. It is about which strategic consequences the new regulation has for the bank. The other thing is about what services we can offer our customers in the future. Believe me, our international competitors are thrilled about the situation we are in.
Question: Let's get into detail: The Council is discussing a 50/50 proposal, where half hard equity and so-called AT1 bonds are to be used. What are these AT1 papers worth?
Answer: AT1 bonds are an integral part of Swiss and international regulation and are already a credible way to enable a restructuring of a bank today. The AT1 proposal creates more clarity and reduces uncertainties, for example, regarding the question of when no more coupons may be paid on the bonds. This helps in a crisis to simplify the restructuring of a bank. This would improve the AT1 bonds compared to their current form. Global investors and rating agencies have reacted positively to the proposal. They have emphasized that the Swiss instruments, which are issued by more than a dozen Swiss banks, which are still similar in the EU and Great Britain. Also, the prices of our AT1 bonds, which are already on the market, have hardly reacted to the announcement of the Council Commission.
Question: But the AT1 bonds issued in the future will be structured differently than the existing AT1 bonds.
Answer: No, the currently discussed provisions work with the existing AT1 instruments. No changes to the instruments are needed. That is why I say: the changes are in line with international regulations and create clarity so that investors know exactly what is happening in which situation. The new conditions also reduce the stigma for a bank. If the equity ratio falls below a certain level, the bank and the supervisory authorities will have no choice in the future: a series of measures will be automatically triggered. No more dividends and interest will be paid, there will be no more share buybacks, bonuses will be reversed.
Question: What exactly changes then?
Answer: We create more clarity: the bank and the supervisory authorities have no choice. They must initiate measures. This is very helpful and not a regulatory experiment, as critics say. If a bank no longer meets the equity requirements, it must publish this immediately the next morning. Then comes the stabilization phase. From that point, investors receive no more coupons and no more dividends. And because AT1 lasts forever, the bonds become capital for the bank. These conditions are not an accelerator in a crisis. On the contrary: as the example of the CS shows, stock prices and the bank's financing costs signal a stressful situation. Only AT1 instruments help to effectively limit the stress by withholding financial funds.
Question: But this structure is a Swiss special path.
Answer: No. The EU and Great Britain know similar regulations. If the bank falls under the capital rules, it is obliged to take measures regarding interest, dividends, and remuneration. The proposal of the Council Commission would introduce the same concept in Switzerland. This is not a special path.
Question: If my bank triggers this mechanism, is it an alarm signal for the customers: The institution is in trouble, I will withdraw my money.
Answer: The opposite is true. Knowing that a full tank of AT1 bonds is available is a very strong signal.
"The authorities have no interest in drawing the actual lessons from the downfall of Credit Suisse."
Question: Do parliamentarians, experts, academics, and Finance Minister Karin Keller-Sutter not understand these arguments and insist on 100 percent hard equity?
Answer: There are indeed politicians and academics who understand that...
Question: . . . but some of the crucial ones do not.
Answer: There are people who have an interest in steering the regulatory debate in a direction that has nothing to do with what happened with Credit Suisse.
Question: For what reasons?
Answer: I have already said: due to the regulatory concessions and the fact that no one has said anything about the actual state of the CS during a long time. The authorities have no interest in drawing the actual lessons from the CS downfall.
Question: Are you talking about the Finance Ministry, the National Bank, and the financial market supervision?
Answer: The Finance Ministry perhaps too, but FINMA and the SNB are certainly co-responsible for what happened with the CS. At its peak, more than half of the equity of the CS head office consisted of regulatory concessions and transitional regulations. That is the reality. Then there is a whole range of experts who have remained silent for years about the CS. And today, everyone is speaking up.
Question: In the Council debate, however, it was noticed that many parliamentarians have great concerns about the AT1 bonds. One does not know whether they would have any protective effect in a crisis.
Answer: If you look at what the financial market supervision, the SNB, and the authorities, as well as the Federal Department for International Finance have provided, then I understand them. I understand the people who are not dealing with the topic every day; they can only be unsettled. That is why we try to explain things.
Question: With limited success.
Answer: The largest investors worldwide and important rating agencies share our position. But who decides in the end? Not the professors, not Sergio Ermotti, not FINMA, not the SNB, or the Finance Ministry. It is the markets that decide whether regulation has the desired effect. They tell us that the proposal works.
Question: But in this case, the parliamentarians decide how the UBS is regulated.
Answer: I appreciate how intensely some parliamentarians have dealt with this complex matter. But one thing is clear: the facts were not presented to them correctly. The Council members are facing an assessment of the AT1 instruments that has nothing to do with what the 50/50 proposal really entails. These are two different things that need to be properly positioned. In the end, one can decide what one wants. But based on facts and not on misleading discussions.
Question: Today, the UBS has a cautious and stress-tested management with you and Colm Kelleher. Politics, investors, and customers trust this leadership. What happens to the next generation of UBS CEOs? What if they are under pressure to generate more returns?
Answer: We cannot eliminate these risks completely, only reduce them as much as possible. At the same time, we cannot eliminate the risk that the wrong people are at the top among the supervisory authorities. It would be like saying: the wrong people can only end up in one bank. Wrong people can end up everywhere.
Question: They are more dangerous in a bank.
Answer: We have dangerous people elsewhere in important positions, not just in banks. And they cause costs for taxpayers. Just think of the F-35 debacle. It costs the taxpayer more than a billion, but no one is talking about protecting the taxpayer here. The fact is: Switzerland already has one of the strictest banking regulations in the world today. In addition, we have a business model at UBS that fits well with the Swiss financial center. If the bank were to change this and take greater risks, then politics and the supervisory authorities would have the opportunity to intervene, and in advance and not only when it is too late.
Question: How confident are you that Switzerland will come to a solution on the capital issue that you and the UBS can live with and get away with with two blue eyes?
Answer: I am very worried. Many politicians are unsettled by the question, and there are also circles that want to unsettle them. But there are also those who really want to understand things. They will all decide on Wednesday. And my impression is: if they doubt, they may press the wrong button. That is why it is important for me to provide the right information here. Because it is about more than the UBS or the financial center. It is about Switzerland.
Sergio Ermotti
The Tessiner has been associated with UBS for many years. The 66-year-old has already led the large bank from the financial crisis of 2011 to 2020. Afterwards he was chairman of the Board of Directors of Swiss Re. After the collapse of the CS, Ermotti returned to UBS in March 2023. Before his time at UBS, he worked in various positions at Unicredit and Merrill Lynch.