Capital rules for UBS: Parliament and, if necessary, the people should decide

The de facto state guarantee for UBS is worth at least 2.6 billion Swiss francs per year. This estimate was recently reached in a study by researchers at the University of Bern based on data for 2022. This estimate was based on the difference between the effective market prices for credit default swaps (CDS) for UBS debt and the theoretical price for the UBS risk profile without a state guarantee. Some earlier studies had also identified financing advantages for major banks from Switzerland and abroad as a result of suspected state guarantees. However, the range of estimates is wide due to methodological uncertainties.

According to UBS, there is no state guarantee. It points in particular to its loss-absorbing capital cushion of around 185 billion dollars and to the rating agencies. Two of the three major international agencies do not include a bonus for a state guarantee in their UBS rating.

Depending on the assessment of the extent of the current state guarantee for UBS, a stronger or lesser tightening of the rules is appropriate – in particular regarding the bank's ability to liquidate in the event of a crisis and its equity cushion.

There is relatively broad consensus on a measure that the Federal Council had already initiated before the CS crisis and which is considered an international standard: enabling state emergency liquidity assistance for systemically important banks. The knowledge of such a safety net is intended to prevent bank customers from fleeing en masse in times of crisis. The core of the planned bill: If the Swiss National Bank (SNB) provides banks with liquidity assistance without collateral in times of need, the federal government can give the SNB a guarantee to cover any losses. In addition to UBS, systemically important banks also include the Raiffeisen Group, Postfinance and Zürcher Kantonalbank.

The big issue is: Should the affected banks pay an annual insurance fee in advance for the safety net? The banks say no, because there is no legal entitlement to emergency aid. In practice, however, it would be highly unlikely that a bank that meets the conditions set out in the proposed law would not receive the possible liquidity aid. In any case, the emergency aid would not be intended to protect the bank, but rather to protect the general public.

How expensive should the insurance be? According to the Federal Council's proposal, the annual flat fee should be based on the risk of loss for the federal government and the business results of the banks concerned. Based on the 2022 figures, the government had promised a sum of between 70 and 140 million francs for all four systemically important banks combined. A large part is likely to go to UBS, which is also the main focus of the controversy.

Theoretically, various relevant criteria could be used to set the fee: the risk of loss for the federal government, the avoidance of distortions of competition and the avoidance of perverse incentives for the banks concerned. In a simple world, the criteria mentioned would in principle look at the same thing from different perspectives. In reality, things may look a little different.

Estimates of the value of the entire implicit state guarantee for UBS are not useful as a direct criterion, but at most as a rough guide. This is because the planned emergency liquidity aid would only make part of this state guarantee official.

In a hearing of the Economic Committee of the Council of States on Monday, four university experts who were interviewed reportedly spoke out in favor of an annual advance fee and recommended a significantly higher level than the Federal Council has in mind. In the internal consultation of the federal administration, the State Secretariat for Economic Affairs (Seco) also suggested significantly higher fees. In its justification, Seco referred, among other things, to estimates of the extent of distortions of competition in favor of large banks, to higher advance payments by banks in Great Britain and Canada, and to the advance financing of an EU crisis fund by the banks.

The Council of States Commission had not yet made a decision on Monday. Instead, it suspended the draft law until the Federal Council presents its final proposals for the overall reform of banking regulation to Parliament - probably at the end of 2026. This is intended to facilitate an overall view, as the planned emergency liquidity aid is linked to other regulations, such as those on equity capital. The following trend statement was heard from Council of States members: the stricter the equity capital requirements for UBS, the lower the advance fee for crisis liquidity must be, as the federal government's risk of loss is reduced.

The Federal Council is not planning a general increase in the required equity ratios. However, it does want the Swiss parent bank (parent company) of systemically important institutions to hold more equity for its foreign investments in the future. In fact, this only affects UBS. Up to now, the parent company has only had to back foreign investments with around 60 percent equity, but according to the will of the Finance Department, this should be 100 percent in the future. A key consideration behind this: In a crisis, the value of investments can quickly plummet. UBS is vehemently opposed to this tightening, which, according to the bank, would require additional "unnecessary" equity of around 24 billion francs.

The Federal Council originally wanted to send the planned tightening of the capital adequacy regulations out for consultation this May via a revision of the Capital Amount Ordinance. But now, according to information from Tuesday, the Finance Department has decided to raise the matter to the legislative level. This is in view of the importance of the issue and also due to claims made by Parliament. In the end, it is not the Federal Council that will decide, but Parliament and possibly even the people. A Federal Council decision on the key parameters of the planned bill on capital adequacy rules for foreign subsidiaries is now expected this May. The draft is due to go out for consultation at the end of 2025.

Will parliament be stricter or less strict than the Federal Council when it comes to the capital adequacy requirements for UBS? It is too early to answer this question, says a member of the Council of States involved. In the current situation, attempts to relax the rules in parliament may be more promising than in the Federal Council. On the other hand, however, the possibility of a referendum with a popular vote on UBS could keep the desire for relaxation in check.