UBS Group AG (UBS.US) Capital Rules Hit Setback in Parliamentary Approval as Swiss Upper House Passes Plan Requiring 90% CET1 Support from Overseas Subsidiaries

The Swiss Council of States (upper house) voted in favor of a compromise proposal on capital requirements for UBS Group AG (UBS.US), a plan that largely adopts the government's demands and represents a setback for the bank. The proposal stipulates that the bank must support 90% of the value of its overseas subsidiaries with its highest-quality capital, namely CET1. While this standard is lower than the 100% backing requirement pushed by the government, it also deviates from a compromise favored by UBS Group AG that relies heavily on convertible bonds. UBS Group AG has explicitly stated its opposition to the 90% plan. On Wednesday, the Council of States passed the proposal by 29 votes to 16, one day after Finance Minister Karin Keller-Sutter signaled openness to the proposal. The bill will now go to the National Council (lower house), with a final decision not expected before next year. Following the vote, UBS Group AG shares gave up early gains and closed roughly flat. Since the collapse of Credit Suisse in 2023, Switzerland has been striving to find ways to make its only global bank crisis-resistant, with the government's approach centered on substantially increasing equity capital. UBS Group AG executives have strongly opposed this, arguing it would make the bank uncompetitive. Lawmakers ultimately chose from three proposalsselected after a debate that ran beyond the allotted time, delaying the vote to Wednesday. The Swiss government's original proposal required UBS Group AG to back its overseas subsidiaries with 100% equity, which could have forced the bank to inject up to $20 billion in additional highest-quality CET1 capital into its domestic entity. The other two options sought 90% equity backing and full backing with 50% equity plus 50% so-called AT1 convertible bonds. UBS Group AG had originally supported the last hybrid option while rejecting the others. But Keller-Sutter delivered a lengthy speech to lawmakers before the vote, rebutting point by point the arguments made by UBS Group AG and its supporters in parliament against the government's plan. In the end, lawmakers voted for a measure more similar to her original proposal than to what UBS Group AG had hoped for. "UBS Group AG does not deny that it has the funds needed to carry out this capital build-up," Keller-Sutter said, adding that the key question is whether these funds are "used to strengthen the Swiss parent bank as the Federal Council hopes, or to benefit shareholders in the form of dividend payouts and share buybacks." It is widely estimated that the government's plan would be the heaviest burden for UBS Group AG, while the AT1 option is seen as the lowest-cost option, although the latter also implies higher capital regulatory requirements. Switzerland's current banking rules require 60% capital backing for overseas subsidiaries, a quarter of which can be covered by AT1 bonds. The government says the current standard proved inadequate during the collapse of Credit Suisse nearly four years ago. UBS Group AG Deeply Disappointed In several public statements in recent days, UBS Group AG CEO Sergio Ermotti and Chairman Colm Kelleher both warned lawmakers against adopting the government's proposal. A group of influential lobbying organizations also issued open letters making similar appeals. UBS Group AG acquired Credit Suisse in early 2023 through an emergency government-brokered deal. The bank's management is frustrated that after the acquisition was completed, Swiss authorities instead sought to impose higher capital constraints on UBS Group AG. Keller-Sutter has said her plan would ensure UBS Group AG remains resilient in a potential crisis, sparing Switzerland from a situation in which its largest bank could slide toward collapse. She rejected the idea that AT1 bonds could replace CET1 capital in such a scenario, given widespread doubts about their applicability in crisis situations. The vote result will now go to the more left-leaning National Council, which may debate it toward the end of the year and form its own position. If the two chambers differ on details, the two bodies will begin passing the bill back and forth to seek a finalized unified text. A final ruling on UBS Group AG's capital requirements is unlikely before 2027 at the earliest, and the decision could also be put to a referendum.