Swiss government tightens capital rules for UBS, other national lenders

A year after Credit Suisse was rescued, the Swiss government has directed UBS and three other systemically relevant banks they must face tougher capital requirements to shield the country's wider economy. In a 209-page report, the Swiss government has issued recommendations on how to police banks deemed "too big to fail". It has pitched 22 measures for direct implementation. It stopped short of saying how far stricter capital requirements should go, Reuters reported.

In March 2023, Credit Suisse collapsed due to years of poor performance, scandals, and risk management failures. UBS acquired the 167-year-old bank in June 2023 with Swiss authorities mediating the deal. UBS's balance sheet is now valued at around $1.7 trillion, twice the size of Switzerland's annual economic output. This substantial figure gives the bank significant influence on the economy.

The 'Too big to fail' plan will come under close scrutiny in Switzerland and beyond because if UBS were to unravel, there are no local rivals left that could absorb it. A bailout and nationalisation would likely cause serious damage to public finances.

"The quantitative and qualitative capital requirements for systemically important banks should be tightened in a targeted way and supplemented with a forward-looking component," the government said in a summary of its recommendations.

The increase in requirements for UBS will be "substantial, especially if UBS were to retain its current size and structure, or even grow," it noted in an explanatory document.

The report floated giving extra powers to Swiss market regulator FINMA, the possibility of applying capital surcharges and strengthening the financial position of subsidiaries, but shied away from a "blanket increase" in capital requirements.

"It is difficult to reach a final judgement on the exact impact of increased capital requirements," it said, noting that they should factor in "proportionality" given competitive pressures facing Swiss banks.

Stricter rules come amid increased scrutiny of Switzerland's banking culture. The lower house of parliament last month backed a motion to claw back pay from senior management if banks are rescued by public money.

The government's TBTF report said it will also consider potential claw backs for bonuses.

Analysts have forecast UBS might have to find billions of extra dollars to safeguard against the risk that it too could suffer a meltdown, but the process is likely to take time as the government said it would wait on the findings of a parliamentary investigation into Credit Suisse's demise.