How a Swiss compromise could save UBS billions

UBS Group AGAdd to myFTGet instant alerts for this topicManage your delivery channels hereRemove from myFTHow a Swiss compromise could save UBS billionsA proposal from a cross-party group of politicians could break the deadlock with the country’s biggest bank Lawmakers have proposed allowing UBS to use AT1 debt to cover up to half of the capitalisation of its foreign units © FT montage/BloombergHow a Swiss compromise could save UBS billions on x (opens in a new window)How a Swiss compromise could save UBS billions on facebook (opens in a new window)How a Swiss compromise could save UBS billions on linkedin (opens in a new window)How a Swiss compromise could save UBS billions on whatsapp (opens in a new window) Save How a Swiss compromise could save UBS billions on x (opens in a new window)How a Swiss compromise could save UBS billions on facebook (opens in a new window)How a Swiss compromise could save UBS billions on linkedin (opens in a new window)How a Swiss compromise could save UBS billions on whatsapp (opens in a new window) Save Simon Foy, European Banking CorrespondentPublishedDecember 18 2025Jump to comments sectionPrint this pageUnlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.Nearly two years after the Swiss government first proposed significantly increasing the capital requirements of UBS — igniting a heated dispute with the country’s largest bank — there are signs that the debate is finally moving in a more amicable direction. A cross-party group of Swiss politicians last week laid out a set of compromise proposals, which recommended considerably watering down the government’s original plans. In doing so, the lawmakers have presented a roadmap that has been cautiously welcomed by the bank and could break the deadlock between the two sides, according to analysts. Here is how their compromise could work: Foreign subsidiariesSwitzerland’s seven-member federal council — the country’s executive branch — proposed in June to increase the bank’s capital requirements by up to $26bn in an attempt to mitigate the risk of another Credit Suisse-style collapse. UBS acquired its crosstown rival in a state-orchestrated rescue in March 2023. The “too big to fail” reforms centre around forcing UBS to fully back its international subsidiaries with capital at the parent bank, a move that the government said would require the lender to have about $23bn in additional loss-absorbing capital. At present, UBS is only required to match 60 per cent of the capital at its international subsidiaries — such as the US and UK — with capital at the parent bank.Under the government’s proposal, UBS would only be allowed to use common equity tier one (CET1) capital — the most expensive form of bank capital — to meet the requirement to fully capitalise its foreign subsidiaries. However, the lawmakers proposed allowing UBS to use additional tier one (AT1) debt to cover up to half of the capitalisation of its foreign units, significantly reducing the overall capital hit. CET1 capital — primarily ordinary shares and retained profits — is the highest-quality capital a bank has. It is used as a bank’s primary buffer to absorb losses and typically does so first in a time of crisis, making it the most expensive type of bank capital. AT1 bonds are debt issued by banks that sit below CET1 in the traditional capital hierarchy and convert into equity or are written down when a lender runs into trouble. Because AT1 debt usually absorbs losses after CET1, investors face less risk, making AT1s a cheaper form of capital. In its third-quarter results, UBS disclosed $74.7bn in CET1 capital and $20.3bn of AT1 debt.Kian Abouhossein, a senior equity analyst at JPMorgan Chase, estimated that under the lawmakers’ proposal to allow UBS use AT1 debt to cover up to 50 per cent of the capitalisation of its international units, UBS would only need to raise an additional $400mn in CET1 capital. This compared with an estimated $20.4bn under the Swiss government’s proposal to fully deduct its foreign subsidiaries only through CET1 capital. Abouhossein added that the compromise scenario would require UBS to raise about $16bn in new AT1 debt. “Getting 50 per cent of subsidiaries backing in AT1 instead of CET1 has a huge impact,” said Jérôme Legras, a managing partner at Axiom Alternative Investments, which is an investor in UBS. “It would bring the required CET1 amount very close to [UBS’s] current level.” Switzerland’s chequered history with AT1sThe proposal to allow use of AT1s to boost UBS’s capital position is likely to raise eyebrows, following Switzerland’s controversial treatment of the instruments in the Credit Suisse takeover in 2023. The UBS-Credit Suisse deal, which was orchestrated by the Swiss government, upended the traditional hierarchy among bank creditors by imposing losses on bondholders while allowing equity investors to recover $3.3bn. A Swiss court ruled in October that regulators’ decision to wipe out SFr16.5bn ($20.7bn) of Credit Suisse AT1 bonds was unlawful, but stopped short of determining whether investors should be repaid. Swiss financial regulator Finma and UBS are appealing against the ruling. However, bondholders are exploring ways to push for a settlement with UBS. “If this goes through, we’ll end up in a funny scenario where most of the recapitalisation would come from the instrument that has been criticised so much: AT1s,” said Legras. Asset valuationThe other key part of the government’s “too big to fail” reform package related to strengthening the quality of UBS’s capital base, namely by tightening how banks quantify items such as deferred tax assets (DTAs), in-house software and other hard-to-value items on their books. This proposal in effect redefines what counts as capital for UBS, wiping out about $11bn by discounting the value of software and DTAs.The government said these changes would add about $3bn to the capital requirements of UBS’s parent bank, but some analysts have estimated that the impact to the wider group could be as high as $11bn. The lawmakers’ compromise proposal recommended that Swiss banks should only be required to follow international rules for most hard-to-value assets, in effect pushing for the government to abandon its proposals in this area. It said the treatment of bank software should comply with EU rules, while DTAs should continue to be treated according to EU, UK, US and Basel III regulations. “The distance to the rules of leading financial centres in the EU, UK, USA, and Asia must never be so great that [Swiss] competitiveness is compromised,” the cross-party group of lawmakers said.Investment bank capThe final recommendation in the lawmakers’ plan was to cap the size of UBS’s investment bank at 30 per cent of its risk-weighted assets. The investment bank already has a self-imposed limit of 25 per cent of UBS’s RWAs, as the Swiss bank’s business model is much more heavily geared towards its comparatively stable wealth management business than its riskier trading and dealmaking activities. Executives at the bank have indicated that they would be in favour of a permanent cap. The lawmakers said UBS should face “discretionary capital surcharges” if it was to exceed this limit. What next?The saga over UBS’s capital position has weighed heavily on the bank’s share price. Since the proposals were first mooted in April 2024, the stock has only climbed by about a quarter compared with a 150 per cent rise in the wider Euro Stoxx Banks index, which tracks the largest lenders in the Eurozone. The cross-party composition of the politicians proposing the compromise capital plan has buoyed analysts and investors. The four parties involved represent a majority of lawmakers in both houses of parliament. This is important because the changes to foreign subsidiaries — the main part of the reform package — is subject to parliamentary approval. A public consultation on these reforms closes in early January, with the parliamentary process expected to start during the second half of 2026. Meanwhile, the reforms around the valuation of assets will be decided by the federal council via an executive ordinance. A decision is expected during the first six months of next year. Andreas Venditti, an analyst at Vontobel, cautioned that there was no certainty that the parties involved in the compromise proposal could guarantee unanimous support within their parliamentary ranks.However, he added that the plan could accelerate the parliamentary process and reduce the uncertainty hanging over UBS. “If everyone agrees, this could potentially be solved by the end of next year.” Others are also cautiously optimistic. JPMorgan’s Abouhossein said the proposal “moves the debate in a helpful direction”, while Axiom’s Legras said: “It looks like we’re getting closer to the finish line.”Reuse this content (opens in new window) CommentsJump to comments sectionPromoted Content Follow the topics in this article European banks Add to myFT UBS Group AG Add to myFT Switzerland Add to myFT Simon Foy Add to myFT Comments