Swiss Upper House Vote Leaves UBS Facing $16B in Extra CET1 Capital

Switzerland's upper house rejected both full backing and the AT1-heavy compromise UBS wanted. By UBS's own estimate, the 90% version still costs about $16 billion of extra common equity.

Switzerland's upper house voted 29 to 16 on September 23 to require UBS to back its foreign subsidiaries with Common Equity Tier 1 capital equal to 90% of their value, up from 60% today. The chamber rejected the government's proposal of full 100% backing. It also rejected the committee compromise UBS favored, a 50/50 mix of CET1 and Additional Tier 1 bonds, the convertible debt that was written off when Credit Suisse collapsed. UBS shares edged up and outperformed the European banking index, a move too small to read as a verdict. One analyst told Reuters the decision was "burdensome for UBS, but apparently no longer a major negative surprise."

The bill now goes to the National Council, with a final decision most likely in 2027. The Social Democrats have said they could launch a referendum campaign if parliament waters the rules down, which limits how far the lower house can move.

How much of the burden survives

Much of the coverage called the 90% plan a compromise. The numbers put it much closer to the government's version than to the bank's.

In April, UBS estimated that fully deducting its foreign participations from UBS AG's standalone capital would require about $20 billion of additional CET1. Changes to the Capital Adequacy Ordinance add about $2 billion at UBS AG, for a total of about $22 billion. After the vote, UBS put the cost of the 90% version at about $16 billion, or about $18 billion including the ordinance changes. Goldman Sachs and Citigroup analysts estimated about $17 billion.

So the 90% rule keeps roughly 80% of the full-deduction burden: $16 billion of $20 billion on the foreign-participation piece, or about $18 billion of $22 billion for the whole package. The reason is the starting point. Today's rule already requires 60%, so moving to 90% covers three-quarters of the distance to full backing, and UBS's figures sit close to that ratio.

The committee route would have changed the mix rather than the total. According to Reuters, it could have let UBS cover about $13 billion of the requirement with AT1 instead of common equity. AT1 is cheaper to carry than equity: it pays a coupon, carries no dividend expectation and does not dilute return on equity. That substitution is what the upper house refused, and it is the main thing UBS lost on Wednesday.

What the equity costs shareholders

Common equity is the most expensive form of bank funding because shareholders expect a return on it. UBS targets an underlying return on CET1 capital of around 15%. Holding an extra $16 billion of CET1 against the same foreign earnings means roughly $2.4 billion of additional annual profit would be needed at that target to keep returns unchanged, by CTOL's arithmetic. Otherwise the return falls, assets shrink, or capital that would have gone to shareholders stays inside the bank.

Buybacks put the number in context. In July UBS started a $3 billion repurchase programme running to mid-2027, and said the pace depends on keeping a group CET1 ratio of around 14% and on how parliament's deliberations go. Gross, $16 billion is a little over five years of buybacks at that rate. The net figure will be smaller, because UBS already holds some capital above its standalone requirement and can phase the build in from retained earnings. The bank has not said how much of that surplus would count against the 90% version, so the net build cannot yet be calculated from public figures. Every $3 billion of existing surplus that counts takes about a year off the gross comparison.

The same arithmetic explains why the transition period now matters as much as the ratio. A long phase-in lets UBS fund the $16 billion from earnings while it keeps paying out. A short one pulls the build forward and squeezes distributions in the next two or three years.

The two sides of the argument

Finance Minister Karin Keller-Sutter framed the choice around where the money goes: whether UBS uses its funds "to strengthen the Swiss parent bank, as the Federal Council wants. Or in favor of shareholders in the form of dividend payouts and buybacks of shares." The Credit Suisse lesson behind that position is that a parent with fully capitalised foreign subsidiaries can sell or wind down a unit abroad without depleting the capital that protects Swiss depositors. AT1 bonds absorb losses only when a regulator writes them down, and in 2023 that happened after confidence had already gone.

UBS argues that it is being asked to hold far more capital than global rivals for the same activities, calling the 90% requirement "a distortion of UBS's competitive position." After the vote it said the outcome "is not a compromise and fails to address the root causes of the Credit Suisse collapse." The market's reaction supports the bank's premise that the cost was largely priced in. UBS shares were up about 10% this year before the vote, against more than 20% for European bank peers.

CTOL view: The National Council will keep the backing requirement at 90% CET1 or higher, with no role for AT1, when it votes on the bill, most likely by mid-2027. UBS will not announce a buyback programme larger than $3 billion a year before parliament's final vote. The referendum threat puts a floor under the percentage, so the lower house's room to help UBS lies in the length of the phase-in, not the ratio. Check against the bill's record on parlament.ch (Curia Vista) and UBS's investor-relations announcements. We are wrong if the National Council's version sets CET1 backing below 90% or lets AT1 count toward it, or if UBS announces a buyback programme above $3 billion a year before the final vote.

Until then, the working assumption for valuation is a burden of $16 billion to $18 billion, most of what the bank had hoped to avoid, with the phase-in the one variable still open.

Swiss Upper House Vote Leaves UBS Facing $16B in Extra CET1 Capital

How much of the burden survives

What the equity costs shareholders

The two sides of the argument

Sources

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