Capital management

Eligible capital

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UBS implemented Basel II, the new international capital adequacy standard formulated by the Basel Committee on Banking Supervision, on 1 January 2008. Therefore, the analysis in this section compares Basel II figures from 31 March 2008 with Basel I figures from previous periods. See the sidebar "Capital measurement under Basel II" for further details on UBS's implementation of Basel II.

Eligible capital

In order to determine eligible Tier 1 and total capital, specific adjustments must be made to equity attributable to UBS shareholders as defined by the International Financial Reporting Standards (IFRS). The most notable adjustment is the deduction of goodwill and investments in unconsolidated entities engaged in banking and financial activities. There is no difference in eligible capital between the BIS guidelines and Swiss Federal Banking Commission (SFBC) regulations.

Tier 1 capital on 31 March 2008 was CHF 22.9 billion, down from CHF 32.4 billion on 31 December 2007. The decline was mainly related to losses on positions related to the US residential mortgage market during first quarter 2008, only partially offset by the issuance of CHF 13 billion in MCNs on 5 March 2008.

Lower Tier 2 capital consists of subordinated long-term debt issued in various currencies and with different maturities. Due to changes in foreign exchange rates, lower Tier 2 capital was CHF 12.8 billion on 31 March 2008, a decrease from CHF 13.8 billion on 31 December 2007. Under Basel II, UBS can account for CHF 1.0 billion additional upper Tier 2 capital from general provisions in excess of expected losses.

Capital components
	Basel II	Basel I
CHF million	31.3.08	31.3.08	31.12.07	31.3.07
Core capital prior to deductions	39,301	39,301	49,781	58,581
of which: paid-in share capital	*207*	207	207	211
of which: share premium, retained earnings, currency translation differences and other elements	*20,307*	20,307	43,187	52,734
of which: mandatory convertible notes (MCNs)	*13,000*	13,000	0	0
of which: non-innovative capital instruments	*298*	298	340	365
of which: innovative capital instruments	*5,489*	5,489	6,047	5,271
Less: goodwill and intangible assets ¹	(13,112)	(12,104)	(13,203)	(13,843)
Less: other Tier 1 deductions ²	(2,119) ³	(2,119) ³	(4,133)	(3,492)
Less: other Basel II deductions ⁴	(1,172)
Total eligible Tier 1 capital	22,898	25,078	32,445	41,246
Upper Tier 2 capital	1,044	38	301	518
Lower Tier 2 capital	12,766	12,766	13,770	13,165
Less: Basel I deductions ⁵		(1,630)	(2,375)	(3,172)
Less: Other Basel II deductions ⁴	(1,172)
Total eligible capital	35,536	36,252	44,141	51,757
1 Includes under Basel I only the intangible assets exceeding 4% of Tier 1 capital. 2 Consists of: i) net long position in own shares held for trading purposes; ii) own shares bought for cancellation (second trading line) or for upcoming share awards; iii) other treasury share positions net of delta-weighted obligations out of employee stock options granted prior to August 2006. 3 Netting of own shares with share-based payment obligations is subject to a grandfathering agreement with the Swiss Federal Banking Commission. 4 Positions to be deducted as 50% from Tier 1 and 50% from total capital mainly consist of: net long position of non-consolidated participations in the finance sector; expected loss less provisions (if positive, for IRB); expected Loss for equities (simple risk weight method); first loss positions from securitization exposures. 5 Consists of the net long position of non-consolidated participations in the finance sector and first loss positions from securitization exposures.

IFRS equity to BIS Tier 1 capital reconciliation

The most important difference between IFRS equity and BIS Tier 1 capital relates to the MCNs. Under International Accounting Standard (IAS) 32, the MCNs are considered as debt issued (CHF 14.6 billion) with a negative equity component of CHF 1.6 billion recognized in share premium. In contrast, for regulatory purposes, the face amount of the CHF 13 billion constitutes eligible Tier 1 capital. Furthermore, an accounting gain of CHF 3.9 billion related to the issue of the MCNs, recognized under IFRS against share premium, was reversed for capital adequacy purposes.

Retained earnings were further reduced by the reversal of the gain on own credit for regulatory capital purposes. This was partially offset by adjustments for differences in the scope of consolidation. CHF 1.0 billion needed to be adjusted downward in net income recognized directly in equity, net of tax for available-for-sale investments and cash flow hedges. Equity attributable to minority interests was adjusted downward by CHF 0.5 billion for minority interests other than trust preferred securities.

IFRS requires a company that holds its own shares for trading and non-trading purposes to record them as treasury shares and deduct them from IFRS equity attributable to shareholders. Under SFBC's Basel I rules, in the past, treasury share positions held as a hedge against payment obligations from employee stock options were not deducted from eligible capital. With the implementation of Basel II, this concept was abolished. According to an interim agreement with the SFBC, UBS is still allowed to net some treasury shares against obligations from employee stock options for a pre-set time period. For this reason, in first quarter 2008, treasury shares amounting to CHF 4.0 billion were not deducted from eligible capital.

Reconciliation of International Financial Reporting Standards equity to BIS Tier 1 capital
	31.3.08
		Basel II		Basel I
CHF million	IFRS view ¹	Reconciliation items	BIS view	BIS view
Share capital	207	0	207	207
Share premium	3,327	4,986	8,313	8,313
Net income recognized directly in equity, net of tax	(3,552)	(1,048)	(4,600)	(4,600)
Revaluation reserve from step acquisitions, net of tax	38	0	38	38
Retained earnings	22,604	(6,048)	16,556	16,556
Equity classified as obligation to purchase own shares	(94)	94	0	0
Treasury shares / deduction for own shares	(6,144)	4,025 ²	(2,119)	(2,119)
Equity attributable to UBS shareholders / gross Tier 1 net of own shares	16,386	2,009	18,395	18,395
Mandatory convertible notes (MCNs)	0	13,000	13,000	13,000
Equity attributable to minority interests	6,310	(523)	5,787	5,787
Total equity / gross Tier 1 including MCNs and hybrid Tier 1 instruments	22,696	14,486	37,182	37,182
Less: goodwill, intangible assets and other Basel II deduction items			(14,284) ³	(12,104) ⁴
Less: accrual for expected future dividend payments			0	0
Eligible Tier 1 capital			22,898	25,078
1 International Financial Reporting Standards (IFRS). 2 Generally, treasury shares are fully deducted from Equity under IFRS, whereas for capital adequacy purposes only the following positions in own shares are deducted: i) net long position in own shares held for trading purposes; ii) own shares bought for cancellation (second trading line) or for upcoming share awards; and iii) other treasury share positions net of delta-weighted obligations out of employee stock options granted prior to August 2006, subject to an interim agreement with the Swiss Federal Banking Commission. 3 Includes primarily 50% of the deductions for net long position of non-consolidated participations in the finance sector, first loss positions from securitization exposures, failed trades, excess of expected losses above general provisions. 4 Equals to Goodwill and the Intangible assets exceeding 4% of Tier 1 capital.

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