The Swiss parliament pushes ahead with a “tough” capital bill. Goldman Sachs estimates that UBS (UBS.US) will need to prepare an additional 17 billion US dollars, and the parent bank has a gap of about 7 billion US dollars

The Zhitong Finance App learned that Goldman Sachs analysts said that a capital proposal recently supported by the Swiss Parliament will require UBS Group (UBS.US) to hold an additional equity capital of about 17 billion US dollars over the existing requirements. Since the bank already holds common share Tier 1 capital (CET1) that exceeds the requirements of Swiss law, Goldman Sachs estimates that based on the capitalization situation in the second quarter, UBS parent bank will have a capital gap of about 7 billion US dollars.

The Goldman Sachs team, led by Chris Hallam, released a report after the Swiss Federal Assembly (upper house) vote on Wednesday, saying, “Compared to the compromise plan recently discussed in Parliament, the regulatory requirements for the results of this vote are more stringent.”

The team led by Citibank analyst Andrew Coombs also expressed concern about the voting results, saying “the legislation has brought uncertainty to UBS's future business model, particularly to international investment banking.”

On the market side, UBS shares fell about 1.2% on the Zurich Stock Exchange. The overall market in the European banking industry has improved in the past few years, but UBS's stock price performance has failed to keep up with the general trend of the sector.

According to information, the Swiss Federal Assembly passed a compromise plan with 29 votes to 16 on Wednesday, requiring UBS to support 90% of the value of its overseas subsidiaries with the highest quality CET1 capital. The plan largely incorporates government requirements. Although it falls short of the 100% support requirement promoted by the government, it deviates from a compromise plan favoured by UBS that makes extensive use of convertible bonds. UBS has clearly stated its opposition to this 90% plan. UBS said in a position paper on Monday that the 90% plan would “seriously damage” its competitiveness.

Meanwhile, in its latest statement on Wednesday, UBS further rejected the Swiss Parliament's latest decision and said it would focus on protecting its long-term interests. The bank said in a statement: “This political outcome was not a compromise, nor did it resolve the root cause of Credit Suisse's collapse. It ignored the serious concerns expressed by the vast majority of respondents during the democratic consultation process, including all business representatives, relevant employee associations, and most states.”

Since the collapse of Credit Suisse in 2023, Switzerland has been trying to find ways to make its only global bank withstand the crisis. The core of the government's idea is to raise equity capital on a large scale. UBS executives strongly opposed this, believing that the move would make it uncompetitive.

Lawmakers chose from three proposals after a debate that went beyond the allotted time. The Swiss government's initial proposal required UBS to support its overseas subsidiaries with 100% equity, which could force the bank to inject an additional 20 billion US dollars of top-quality CET1 capital into domestic entities. The other two options are to seek 90% equity support and provide full support with 50% equity plus 50% of the convertible debt of so-called AT1 bonds. UBS originally supported the last hybrid plan, while rejecting the others.

Swiss Finance Minister Karin Keller-Zotel delivered a lengthy speech to lawmakers before the vote, refuting the arguments put forward by UBS and its supporters in parliament about the government plan one by one. In the end, lawmakers voted for a measure more similar to her original proposal than what UBS wanted. Keller Zotel said, “UBS does not deny that it has the funds needed to carry out this capital supplement”. The key is whether these funds are “used to strengthen the Swiss parent bank in accordance with the wishes of the Federal Council, or to benefit shareholders in the form of dividends and share repurchases.”

Outsiders generally estimate that the government plan is the heaviest for UBS, while the AT1 plan is viewed as the lowest-cost solution, although the latter also means increased capital regulation requirements. Switzerland's current banking rules require overseas subsidiaries to be provided with 60% capital support, a quarter of which can be covered by AT1 bonds. The government said that during the collapse of Credit Suisse nearly four years ago, current standards have proven insufficient.

UBS CEO Sergio Hermotti and Chairman Colm Kelleher warned lawmakers not to adopt government proposals in several public statements recently. A group of influential lobbying organizations also issued an open letter making a similar appeal. UBS acquired Credit Suisse in early 2023 through an emergency transaction led by the government. The bank's management was dismayed by this: after the takeover was implemented, the Swiss authorities instead tried to impose higher capital restrictions on UBS.

Keller Zotel has said that her plan will ensure UBS's resilience in the face of potential crises and save Switzerland from falling into a situation where its largest bank may slide all the way to collapse. She dismissed the idea that AT1 bonds could be used as an alternative to CET1 capital in this case because people generally doubt their applicability in crisis situations.

The dust has yet to settle on the amendments to the Swiss banking law. The voting results will now be submitted to the more left-leaning National Assembly (lower house). The National Assembly may debate it and form its own position at the end of the year. The final decision is not expected to be made earlier than next year. If the two houses disagree on the details, the two institutions will begin passing the bill back and forth to seek to finalize the unified text. The final ruling on UBS capital requirements will not be made until 2027 at the earliest, and the decision may also be put to a referendum.