UBS Group AG already has enough capital to meet proposed new requirements in the reform pushed by the Swiss government, according to the Swiss National Bank.
In its annual financial stability review published Thursday, the central bank said that it continues to support the government — known as Federal Council — in demanding a full capital backing of the bank’s foreign units. Given that UBS has reserves of $9 billion at its Swiss unit, it already has sufficient capital to meet the proposed requirements, the SNB said.
“In addition, the Federal Council is proposing a considerable transition period,” SNB Vice President Antoine Martin told reporters. “If you take into account this transition period, it would be possible for UBS to not only achieve this, but also continue to distribute profit to its shareholders.”
The report adds to evidence that Swiss authorities are aligned as UBS awaits the final decision on its new capital requirements. The lender has disputed numbers the government put forward and has considered options including a headquarter relocation. In late April, Switzerland watered down part of the reforms but refused to back down on its core demands.
The core package is now being debated in parliament and the process is expected to last until next year. Lawmakers look set to reduce the government’s demands, but there’s also broad agreement that requirements should rise from their current levels. The committee responsible will meet again in August and could then formally propose easing.
The government wants to force UBS to raise the amount of common equity capital it holds domestically against its foreign operations to 100% of each unit’s equity value, from 60% at present. UBS estimates that this would require it to add about $20 billion in CET1 capital to its Swiss entity. The lender has said that the plan would severely damage its business model, and by extension hurt the domestic economy.
A UBS spokesperson said the SNB’s report was “misleading” and that the “cumulative capital impact of the proposed measures would be a significant competitive disadvantage both domestically and internationally.”
“Today’s report by the SNB continues to reiterate misleading statements, including an incomplete analysis of the root causes of the collapse of Credit Suisse, the role of AT1 and the impact of Basel 3 capital rules, rather than offering the distinct independent analysis needed for a fact-based policy debate that is critical to the future resilience of Switzerland’s financial center,” the bank said in an email.
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Martin earlier pushed back against UBS’s concerns, saying the government’s proposal is “proportional.”
“It would put UBS among the leading globally systemically important banks in terms of risk-weighted assets,” he said. “In terms of leverage ratio, it would put UBS around the average of global G-SIBs, and compared to domestic competitors, UBS would still rank below average. So, again, this is not a measure that puts UBS in a completely different category.”
The SNB, along with financial regulator Finma, has consistently supported the idea of full capital backing. The International Monetary Fund has also endorsed the approach.
“As highlighted during the crisis at Credit Suisse, risks associated with foreign participations are not adequately covered by the current regulatory capital regime,” the SNB said in the report.
In the report, the SNB highlighted that UBS is special among Swiss banks in that it can face significant losses from both domestic and foreign exposure. Stress tests showed that “the loss potential for UBS under the various stress scenarios remains substantial,” the central bank said.
The bank would be hit hardest by a global recession scenario, followed by an asymmetric recession scenario, the SNB said. It also noted, though, that UBS and most Swiss domestic banks could probably handle the most likely situations.
“Overall, the Swiss banking sector is well placed to face the challenges presented by the current environment,” the central bank said. “The SNB’s stress tests for the domestically focused banks and UBS suggest that most banks could absorb the losses under relevant adverse scenarios.”
The SNB report also showed that financial stability risks from hedge funds are limited in Switzerland. While the impact of their investment strategies particularly on government bond markets has come under scrutiny globally, the Swiss market is not attractive for them, the central bank said.
Local financial stability risks from stablecoins are low due to low volumes and low adoption, the SNB said. Officials see the main risk in that are stemming from the promise of at-par convertability, despite a potentially volatile backing of the assets.