Changes in 2008

On 1 January 2008, UBS adopted the revised capital framework of the Basel Committee on Banking Supervision - Basel II - which introduced new and amended capital requirements for the different risk types and revised the calculation of eligible capital.

Regulatory capital requirements are measured by reference to risk weighted assets (RWA). Basel II had the greatest impact on RWA for credit risk, where there were substantial changes in calculation, and operational risk, for which a new capital requirement was introduced. Requirements for market risk and non-counterparty related assets are fundamentally unchanged.

The implementation of these changes led to a slight decrease in UBS's overall capital requirements, as measured by RWA, but the impact on individual business groups varied - Global Wealth Management & Business Banking saw lower RWA for customer loans, mortgages and Lombard lending, while the Investment Bank was subject to higher capital requirements for over-the-counter (OTC) derivatives and repo-style transactions (i.e. repurchase / reverse repurchase and securities, lending and borrowing transactions).

Eligible capital calculations have also been modified by the introduction of new deductions from Tier 1 capital and total capital. These resulted in lower eligible capital and a moderate decline in UBS's capital ratios.

UBS generally applies the more advanced approaches offered by the Basel II framework for calculation of RWA, including the Advanced Internal Ratings Based Approach (AIRB) for credit risk and the Advanced Measurement Approach (AMA) for operational risk.

Capital requirements by risk class

Credit risk
A key change is the calculation of risk weights for credit risk - while Basel I generally considered only counterparty type, Basel II also considers counterparty ratings and is more sensitive to the type of transaction and collateralization.

Under the AIRB approach, risk weights are determined by reference to internal counterparty ratings and loss-given default estimates. UBS uses internal models, approved by the Swiss Federal Banking Commission (SFBC), to measure the credit risk exposures to third parties on OTC derivatives and repo-style transactions. For a smaller part of its credit portfolio, UBS applies the Standardized Approach (SA-BIS), based on external ratings.

Market risk
For most market risk positions, UBS derives its regulatory capital requirement from its internal Value at Risk (VaR) model, which is approved by the SFBC. For some small positions, market risk regulatory capital is computed using the standardized method defined by the SFBC. In order to compute the capital ratios, the total market risk capital requirement is converted to an "RWA equivalent" (shown in the table "Segmentation of required capital" on page 61 as market risk positions) such that the capital requirement is 8% of this RWA equivalent.

Operational risk
Following the introduction of Basel II, UBS is now required to hold capital against operational risks. UBS quantifies operational risk according to the AMA, which considers both historical losses and forward-looking scenarios. Under this approach, capital requirements for operational risk are converted into RWA equivalents in the same way as for market risk.

Non-counterparty related assets
Non-counterparty related assets refer most notably to assets such as UBS premises, other properties, equipment and software. Such assets are not subject to credit or market risk, but they represent a risk to the Group in respect of their potential for write-down and impairment. Therefore, they require capital underpinning according to prescribed regulatory risk weights. With the introduction of Basel II, intangible assets are no longer risk weighted, but are instead deducted from capital.

Swiss Federal Banking Commission requirements
Although UBS determines published RWA according to the Basel II Capital Accord (BIS guidelines), the calculation of UBS's regulatory capital requirement is based on the regulations of the SFBC, leading to higher risk weighted assets for two main reasons:

- a multiplier of 1.1 is applied to credit risk capital requirements calculated using SA-BIS; and

- a multiplier of 3.0 is used to scale-up the capital requirements for non-counterparty related assets.

Consolidation for regulatory capital
UBS's financial statements are produced in accordance with International Financial Reporting Standards (IFRS). Under IFRS, subsidiaries and special purpose entities directly or indirectly controlled by UBS are consolidated. However, for regulatory capital purposes, only subsidiaries that are active in the banking and finance business are consolidated in accordance with Basel II regulations.