The Swiss government has proposed new capital requirements for UBS that would mandate the banking giant to hold an additional $26 billion in core capital after its 2023 takeover of Credit Suisse.

In addition, UBS may need to fully capitalize its foreign units and potentially reduce share buybacks.

According to a government statement, “The rise in the going-concern requirement needs to be met with up to USD 26 billion of CET1 capital, to allow the AT1 bond holdings to be reduced by around USD 8 billion,” referring to UBS’ holding of Additional Tier 1 (AT1) bonds.

While the measures equate to an additional $26 billion in core capital, the requirement for new capital is $18 billion, which is $2 billion less than the $20 billion that JP Morgan estimated earlier in the week.

Following the proclamation, UBS shares increased by 6%.

Johann Scholtz, senior equity analyst at Morningstar, said that the news was “as bad as it will get for UBS.”

Scholtz added that the banking giant “can now lobby for some concessions and take some actions themselves to mitigate impact, for instance upstream some excess capital from its subsidiaries,” noting that negotiations will begin instantly, with a long phase-out period until 2034.

The Swiss National Bank voiced its support for the government’s measures, stating that they will “significantly strengthen” UBS’ resilience.

The SNB said in a statement that the measures “increase a bank’s room for manoeuvre to stabilise itself in a crisis through its own efforts,” and reduce “the likelihood of a large systemically importent bank such as UBS getting into financial distress,” making it “less likely that UBS has to be bailed out by the government in the event of a crisis.”

Concerns Over Systemic Risk

“As bad as it will get for UBS.”

As acquiring Credit Suisse, UBS has faced increased scrutiny and the potential for stricter capital regulations. The acquisition occurred after years of strategic errors, mismanagement, and scandals at Credit Suisse.

The collapse of Credit Suisse also led to criticism of Swiss financial regulator FINMA for its perceived lack of oversight and the timing of its intervention.

Swiss regulators contend that UBS requires stronger capital reserves to protect the national economy and financial system, given that the bank’s balance sheet reached $1.7 trillion in 2023, approximately double Switzerland’s projected economic output for that year. UBS maintains that it is indeed not “too big to fail” and that the additional capital requirements will negatively impact its competitiveness by reducing cash liquidity.

A key concern is UBS’s capacity to absorb potential losses at its foreign units, where it has been required to back 60% of capital with capital from the parent bank.

Increased capital requirements can decrease a bank’s balance sheet and credit supply by raising funding costs and reducing the willingness to lend and take risks. Shareholders may see an impact on discretionary funds for dividends, share buybacks, and bonuses.

According to Johann Scholtz, “While winding down Credit Suisse’s legacy businesses should free up capital and reduce costs for UBS, much of these gains could be absorbed by stricter regulatory demands.”

Scholtz added that “Such measures may place UBS’s capital requirements well above those faced by rivals in the United States, putting pressure on returns and reducing prospects for narrowing its long-term valuation gap. Even its long-standing premium rating relative to the european banking sector has recently evaporated.”

UBS’s extensive U.S. presence through its global wealth management division, combined with the prospect of stringent Swiss capital rules, coincides with the impact of White House trade tariffs. In April, UBS lost its crown as continental Europe’s most valuable lender by market capitalization to Santander.