Switzerland is approaching a difficult decision over proposed banking regulations for UBS, as lawmakers attempt to strengthen the financial system following the collapse of Credit Suisse in 2023. The challenge is to introduce safeguards strong enough to protect the country from future banking crises without driving its largest bank to relocate its operations abroad. At the same time, easing the proposed requirements too much could trigger a public referendum and extend uncertainty over the bank’s regulatory future.
A committee in Switzerland’s lower house of parliament is scheduled to begin examining the banking measures on October 26, following their approval by the upper house last month. UBS has argued that the proposed capital requirements would place an excessive burden on the bank and weaken its ability to compete internationally. However, political support for substantially reducing the requirements appears limited, making a compromise difficult to achieve.
The debate has gained importance as major investors have encouraged UBS to consider moving to a jurisdiction with more favourable regulatory conditions. Sources familiar with the matter have told Reuters that the bank is preparing contingency plans that could include transferring its headquarters overseas or combining with another financial institution. Nevertheless, abandoning Switzerland could carry considerable costs, particularly for a bank whose identity and operations remain closely connected to Zurich.
Leo Mueller, a Centre Party member of the parliamentary committee, described the situation as a delicate balancing act. He warned that weakening the proposed rules excessively could provoke a referendum, potentially resulting in voters rejecting the legislation and leaving the country without an agreed regulatory framework. Conversely, requirements that are too demanding could encourage UBS to conclude that Switzerland has become an unattractive place to conduct business.
The possibility of a referendum adds another layer of complexity. Under Switzerland’s political system, legislation can be challenged through a public vote if sufficient support is secured. Such a process could delay the introduction of new banking rules and prolong uncertainty for UBS, its shareholders and the wider financial sector.
Disagreement Over Capital Requirements
The central dispute concerns how much high-quality capital UBS must maintain to support its foreign subsidiaries. The Swiss upper house has backed a requirement for the bank to finance these overseas operations with Common Equity Tier 1 (CET1) capital equivalent to 90% of the relevant requirement. This would represent a significant increase from the existing 60% threshold, which allows part of the capital buffer to be covered by less expensive forms of capital.
The Swiss government had proposed a stricter requirement of 100% CET1 capital. The upper house’s decision therefore represented a reduction from the government’s original plan, but UBS still considers the approved level excessive and argues that it could undermine its international competitiveness.
UBS has repeatedly stated that it intends to remain in Switzerland, maintaining that its presence benefits both the institution and the country. However, the disagreement over capital rules has raised questions about whether the bank can continue operating under the proposed framework without facing significant additional costs.
Finance Minister Karin Keller-Sutter reportedly wants parliament to approve the 90% CET1 requirement, according to a person familiar with the matter. Her ministry declined to comment. Keller-Sutter has also indicated that a referendum remains a possible outcome.
The Social Democrats, who support requiring UBS to provide 100% CET1 capital for its foreign subsidiaries, have said they will decide whether to pursue a referendum after parliament reaches its decision. A final parliamentary outcome is not expected before December at the earliest.
Some investors have expressed concern that the proposed requirements could place excessive pressure on UBS. Artisan Partners, one of the bank’s shareholders, has publicly called on the institution to leave Switzerland rather than accept the regulations.
Compromise Remains Possible but Difficult
Several lawmakers are exploring alternatives that could address concerns about financial stability while reducing the burden on UBS. Hans-Peter Portmann of the centre-right Liberal Party, known as the FDP, has suggested setting the CET1 requirement for foreign subsidiaries at 75%.
His proposal would also introduce a mechanism to strengthen the bank’s capacity to absorb losses if its capital ratios fell below a specified level. The approach is intended to balance protection for the Swiss public against the bank’s need to remain competitive and continue investing in its future.
Portmann said a settlement should allow UBS to compensate shareholders appropriately for the risks they assume, preserve funding for future investment and minimise the possibility of losses falling on Swiss taxpayers.
Additional proposals are expected to emerge before the lower house holds its full debate, which is anticipated in December.
Political Support for Strict Rules
The upper house’s backing for the 90% CET1 requirement was stronger than anticipated, indicating substantial support for tighter oversight following the Credit Suisse crisis.
The political landscape in the lower house could make significant concessions difficult. Left-of-centre parties have a stronger presence there, while centrist and centre-right lawmakers are divided or increasingly inclined towards tougher requirements, according to parliamentary sources.
FDP lawmaker Olivier Feller said the lower house might ultimately settle on the 90% threshold. Although he personally supports requiring 100% CET1 capital for UBS’s foreign subsidiaries, he noted that his party had not finalised its position. He also highlighted the challenge facing Switzerland as a relatively small country hosting a major international bank.
Urs Saxer, a law professor at the University of Zurich, expects any compromise to remain close to the 90% proposal. He argued that UBS would not make an irrational decision to leave Switzerland, given the considerable advantages associated with the country’s stability and legal certainty.
As parliamentary discussions continue, Switzerland must determine how to protect its financial system without jeopardising the future of one of its most important financial institutions. The eventual decision will shape UBS’s operating environment and could influence the country’s position as an international banking centre.
