Exclusive-UBS floats concessions to broker Swiss capital compromise, say sources

By Ariane Luthi and Oliver Hirt

ZURICH (Reuters) - Two years since it acquired Credit Suisse to create a Swiss banking giant, UBS is trying to head off tougher regulations by offering to limit the future size of its investment bank and hold more capital, people familiar with discussions said.

The 2023 collapse of Credit Suisse was a watershed for Switzerland, leaving it with just one global lender and prompting regulators to demand it hold more capital to make the industry safer.

UBS executives say that will hurt Swiss financial competitiveness, while the head of the main Swiss banking lobby warned this month that excessive demands could spur the lender to move its headquarters abroad.

"I never expected the greatest obstacle to delivering a successful outcome would come from the same authorities who asked us to take on the Credit Suisse challenge," UBS CEO Sergio Ermotti said in a memo to staff he published on March 19, reflecting on the regulatory challenges.

UBS makes most of its profits managing money for the wealthy, but if it is saddled with excessive capital demands, it could depress the bank's shares and make it a takeover target, according to two people familiar with the lender's concerns.

Its wealth management business in particular could be attractive to rivals such as Morgan Stanley, JPMorgan, Goldman Sachs and HSBC, one of the people said.

Behind the scenes, UBS is offering regulators some reassurances so it can avoid having to stump up what it estimates could total over $40 billion in additional capital compared to where it stood before buying Credit Suisse.

That is the amount it would need should the bank be required to back its participation in foreign entities with 100% equity instead of 60% at present, as financial regulator FINMA wants, according to a UBS presentation to lawmakers seen by Reuters.

One potential concession UBS has floated to politicians is capping the investment bank at around 30% of its total business, according to two people familiar with the matter.

The division, which trades stocks and bonds and advises companies on deals, is considered riskier than some other businesses because of its direct exposure to market swings.

Excluding non-core and legacy assets, the investment bank accounted for about 21% of UBS's risk-weighted assets at end-2024, allowing some room for growth.

The division accounted for nearly two-thirds of such assets in 2008, when UBS needed a government bailout, an experience that weighs on Swiss public debate about regulation.

Another concession is an offer to bolster the bank's capital, albeit not as much as some politicians are looking for.

UBS estimates that as a result of the Credit Suisse takeover and new international rules, it will already need as much as $19 billion in additional capital.UBS may be prepared to add a further $5 billion, two sources said, a fraction of the amount advocates for strict capital rules, such as FINMA, would like it to hold.

A UBS spokesperson said the bank supported in principle the government's efforts to strengthen financial stability provided they did not put disproportionate burdens on the institution.

"UBS is already one of the best-capitalized banks globally," the spokesperson said.

In May, the government is due to give an estimate of how much additional capital UBS should hold under the new rules, though the final approval process for the regulation could take until 2028 or longer, officials say.

Meanwhile, UBS is examining all possible scenarios, including moving its headquarters, though it has no intention of leaving Switzerland, two sources said.

Last month's government decision to make parliament responsible for the new rules opened the door for UBS to lobby lawmakers into taking the sting out of regulation even as the industry stirs the threat the bank could disappear.

Franziska Ryser, a lawmaker from the centre-left Green Party who sits on the economic affairs and taxation committee which oversees banking regulation, rejected the notion that the regulatory overhaul could trigger the bank's departure.

"There won't be demands made leading to these consequences. This will all be discussed calmly and a suitable solution will be found," she told Reuters. "Extreme rules won't be set."

(Additional reporting by Dave Graham; Editing by Tommy Reggiori Wilkes and Tomasz Janowski)