90% CET1 becomes the trigger! UBS (UBS.US) may leave due to new capital regulations, Swiss parliament faces dilemma of "too strict rules driving away major banks, too lenient rules facing referendum"

Zhitong Finance APP reports that following the collapse of Credit Suisse in 2023, Swiss lawmakers are formulating new capital regulatory rules for UBS (UBS.US). However, this has placed the country in a dilemma: if the standards are too strict, Switzerland’s largest bank may be forced to relocate; if the standards are too relaxed, it could trigger a nationwide referendum, further fueling uncertainty.

The Swiss Federal Council (Upper House) passed a banking bill last month, which UBS management stated contains provisions they find unacceptable. The National Council (Lower House) committee will begin reviewing this set of banking regulatory bills on October 26. At present, the possibility of a significant loosening of regulations appears to be very small.

According to sources, major investors have already urged UBS to leave Switzerland in search of a more favorable regulatory environment, and UBS is drafting potential contingency plans, including relocating its headquarters or merging with another bank. On the other hand, the Zurich-based wealth management giant may be reluctant to bear the enormous costs of leaving and is also unwilling to lose its Swiss identity.

Leo Müller, a centrist lawmaker in the committee, stated that Parliament is caught in a tricky situation. He pointed out, “If we relax the standards too much, it will trigger a referendum. The public may feel that regulations are too weak, reject the bill, and we’ll end up with nothing. Conversely, if the standards are too harsh, banks will say: Switzerland’s business environment has deteriorated, and we will seek opportunities elsewhere.”

Stakeholders have started exploring compromise solutions, and some lawmakers are trying to ease requirements in the bill. However, there is a cross-party consensus that achieving significant deregulation will be very difficult.

The Shadow of a Referendum

It is understood that the Upper House’s proposal requires UBS to allocate 90% of core Tier 1 capital (CET1) to support its foreign subsidiaries. The current buffer requirement is 60%, and a portion of that can be satisfied using less costly forms of capital instruments. The Swiss government’s initial proposal called for as much as 100% core Tier 1 capital.

UBS has repeatedly expressed its intention to stay rooted in Switzerland, claiming that remaining in the country is beneficial to both the bank and the nation. However, the bank believes the 90% CET1 requirement is too high and would severely damage its competitiveness.

According to sources, Finance Minister Karin Keller-Sutter has hinted at the risk of the bill facing a nationwide referendum (a referendum challenge can be launched if the statutory number of signatures is gathered), and she hopes Parliament will settle on the 90% CET1 target. The Ministry of Finance declined to comment on the matter.

The Social Democratic Party supports the 100% CET1 requirement, stating that it will decide whether to initiate a referendum only after Parliament reaches a final decision; the earliest parliamentary vote will not take place until December.

However, some shareholders believe the new regulations will constrain UBS's operational flexibility. Artisan Partners has publicly argued that these regulatory rules could force UBS out of Switzerland.

Hans-Peter Portmann, center-right FDP (Free Democratic Party) lawmaker, has proposed a compromise: apply a 75% CET1 requirement to UBS’s foreign subsidiaries, alongside a mechanism that would automatically boost the bank’s loss-absorbing capacity if the capital ratio falls below a certain threshold. He stated, “A workable solution will eventually be found. It must allow UBS to reasonably pay risk returns to shareholders, reserve capital for future investments, and at the same time minimize the risk to the Swiss public of bank defaults.”

Analysts expect further proposals to emerge before the full Lower House debate in December.

Tougher Regulatory Approach

The Upper House’s support for the 90% CET1 solution exceeded market expectations. Parliamentary insiders say left-wing parties hold more seats in the Lower House; centrist and center-right groups remain divided, but overall favor a tougher regulatory stance.

FDP lawmaker Olivier Feller said, “Personally, I believe it’s highly likely the Lower House will ultimately settle on the 90% standard.” He himself supports a full 100% CET1 requirement for UBS’s foreign subsidiaries but says party positions are still under discussion. “We are a small country, yet we have massive banks.”

Urs Saxer, a law professor at the University of Zurich, believes that any final compromise will most likely be close to the 90% standard. “UBS will not make an irrational decision,” he said. “If the bank decides to relocate, it would need extremely compelling reasons; what Switzerland can offer—stability and legal certainty—will be hard to match in the current environment.”