UBS, Switzerland’s sole remaining global bank, which acquired Credit Suisse in a state-engineered takeover in 2023, could realise annual savings totalling hundreds of millions of dollars. This potential hinges on Swiss lawmakers approving an alternative proposal for Additional Tier 1 (AT1) bond usage, part of a broader overhaul of banking laws. The proposal, currently before parliament, tightens existing AT1 rules but presents a less costly path than the government’s initial plan. That plan demanded UBS meet new capital requirements primarily with Common Equity Tier 1 (CET1) capital, with the government seeking around $20 billion more in CET1 to back UBS’s international units.
A parliamentary committee last month passed a compromise, allowing UBS to utilise an additional $13 billion in AT1 bonds instead, following extensive lobbying. AT1s are a form of regulatory capital just below CET1; unlike CET1 which absorbs losses immediately, AT1 bonds can be written down or converted into equity in a crisis. The write-off of 16 billion Swiss francs ($19.6 billion) in Credit Suisse AT1 bonds significantly facilitated the UBS takeover. While supporters argue AT1 bonds aid bank stability, Swiss regulators consider them less secure than CET1 capital.
Investment experts, including Filippo Alloatti of Federated Hermes, view this proposal as a victory for UBS. While changes might slightly increase AT1 debt costs, potentially raising 10-year AT1 bond rates to around 7%, this is substantially cheaper than the estimated 9-10% cost of equivalent CET1. Such a difference could save UBS hundreds of millions annually. The committee’s proposal also requires UBS to suspend investor payouts and reduce bonus payments if its CET1 ratio falls below required levels. A final decision on these capital rules is anticipated, likely in 2027.
