UBS on the brink of Switzerland’s ‘too big to fail’ reckoning

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ZURICH, April 8 (Reuters) – Since UBS rescued its stricken rival Credit Suisse a year ago, it has been waiting to hear how authorities will protect Switzerland from the risk of the country’s only remaining big bank also imploding. It is about to find out.

The Swiss government is this month due to publish its recommendations for policing banks that are “too big to fail”, which could saddle UBS with tougher business rules.

In what is expected to be a several hundred-page report, the capital requirement section will be particularly scrutinised, with UBS potentially having to find tens of billions of extra dollars to safeguard against a Credit Suisse-style meltdown.

“Switzerland simply cannot allow UBS to fail,” said Stefan Legge, an economist at the University of St. Gallen. “If it did it would have an absolutely devastating effect on the Swiss economy.”

At around $1.7 trillion, UBS’s balance sheet is double the size of annual Swiss economic output, giving the bank an exceptional weight for a major economy.

Should UBS unravel, there are no local rivals left to absorb it. And the cost of nationalisation could shatter public finances, experts say.

The Swiss lower house of parliament in May 2023 backed a motion calling for systemically relevant banks to have a leverage ratio of 15% of assets, far more than in the European Union, the United States and Britain.

Based on common equity tier 1 capital of $79 billion, UBS had a 4.7% ratio at the end of 2023.

The higher ratio would likely leave UBS needing to find well over $100 billion in additional equity, said Andreas Ita from consultancy Orbit36.

“This can’t be done within a reasonable period by withholding profits, and raising such sums via capital markets is hardly realistic,” Ita said.

The bank could, however, shrink its balance sheet and reduce credit supply, he added.

LOBBYING

Few analysts expect such onerous terms to be imposed, but it helps explain why UBS has been keen to make itself heard.

“UBS is trembling,” said an industry source familiar with the situation, who noted the bank had unleashed a major lobbying drive that would continue until the last minute among the many “open doors” it had found among politicians and officials.

Both UBS and the Swiss government declined to comment.

Finance Minister Karin Keller-Sutter said last year that more demanding capital requirements were coming. However, she also said excessive regulation could hamstring Switzerland’s ability to compete with other financial centres like New York, London, Singapore and Dubai.

“If you want to stay in the top league, you won’t be able to avoid taking certain risks in future,” she said.

For its part, UBS has warned that excessive capital requirements would ultimately hurt the consumer.

“If you have too much capital, you punish shareholders, but also customers, because banking services become more expensive,” UBS chair Colm Kelleher told the NZZ am Sonntag paper recently.

Significant changes are not expected to be enacted this year. Parliament must first consider any recommendations before the government submits a draft law. Then consultations begin with banks and other stakeholders.

In the end, said the University of St. Gallen’s Legge, politicians are unlikely to create too many hurdles for UBS.

“There is no plan B this time,” he said. “The main policy will be hope – hope that UBS doesn’t get into trouble. But hope is not a strategy.”

 

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Edmund Shing, PhD

Global Chief Investment Officer
BNP Paribas Wealth Management

Edmund has over 29 years of experience in financial markets in a wide variety of positions, ranging from proprietary trading to portfolio manager in a number of financial institutions in London and Paris.  He previously held the role of Global Head of Equity and Derivative Strategy at BNP Paribas in London from 2015 to 2020, and has been Chief Investment Officer at BNP Paribas Wealth Management since November 2020.

Edmund is responsible for piloting our investment strategy and will continues to rollout out recommendations and themes with actionable advice that brings our expertise to our clients and support to our client-facing teams.  In this time of change, his expertise in following and anticipating markets is a true value added for both our customers and those at Wealth Management who serve them.

Edmund has a PhD in Cognitive and Computing Science from the University of Birmingham in the United Kingdom, and has done advanced studies in Knowledge-Based Systems and in Experimental Psychology.  He is an EFFAS-certified financial analyst. He has also authored the book “The Idle Investor” published by Harriman House in 2015, proposing 3 simple investment strategies that take only a few minutes to execute per month.

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