Capital management

In first quarter 2008, UBS implemented a new framework for attributing the equity capital to its businesses. This reflects UBS's overarching objectives of maintaining a strong capital base and guiding businesses towards activities with the best balance between profit potential, risk and capital usage. In this framework, the Group Executive Board (GEB) attributes equity to the businesses after considering their risk exposure, asset size, goodwill and intangible assets.

The design of the equity attribution framework enables UBS to:

- calculate and assess return on attributed equity (RoaE) in each of its businesses. With effect from first quarter 2008, RoaE and return on BIS risk-weighted assets (RoRWA) are disclosed for all business groups and units and replace the previously disclosed "return on allocated regulatory capital" measure;

- integrate Group-wide capital management activities with those at business group and business unit level;

- measure performance in a consistent manner across business groups and business units; and

- make better comparisons between the Group's businesses and those of competitors.

The framework operates as follows. First, each business is attributed an amount of equity equal to the average book value of goodwill and intangible assets, as reported for that business group or unit according to the International Financial Reporting Standards. Next, the GEB considers a number of factors that drive required capital, including:

- equity requirements based on aggregated risk exposure, including the potential for losses exceeding UBS's earnings capacity as defined by the firm's "capital-at-risk" concept, which is described in UBS's Annual Report 2007, in Risk, Treasury and Capital Management, pages 8-10;

- regulatory capital requirements which are based on risk-weighted asset usage of the businesses and also take into account the different market standards for Tier 1 ratios associated with "pure-play" competitors of each of the businesses; and

- the asset size of the businesses.

After reviewing the results of this formulaic approach, the GEB makes adjustments to the final tangible equity attribution to reflect the amount of equity it believes is appropriate for each business. This assessment is based on the expectations of the business's clients and the business environment, including allowing for sufficient capital to support the business's underlying risks and sustain extreme stress scenarios.

The table below provides the attribution of equity by business for first quarter 2008.

The amount of equity attributed to all the businesses corresponds to the amount that UBS believes is required to maintain a strong capital base and support its businesses adequately. If the total equity attributed to the businesses differs from the Group's actual equity during a particular period, the surplus or deficit is shown in Corporate Center. As reflected in the table below, there was a substantial deficit reported in Corporate Center during first quarter 2008. The measures taken to restore UBS's capital position - the mandatory convertible notes issued in March 2008 (and convertible to equity no later than 2010), the hybrid Tier 1 capital issued in April 2008 and the rights issue, expected to be completed in second quarter 2008 - are explained on pages 61 of this report and are expected to address this deficit.

Corporate Center continues to transfer interest income earned from managing UBS's consolidated capital back to the businesses. The over-allocation of equity in first quarter 2008 resulted in a charge to Corporate Center exceeding the interest income earned.

RoaE for the individual business groups and units is disclosed in the respective sections of this report.