UBS - Capital management

Spreadsheets

Capital requirements

2Q08 vs 1Q08:

RWA under Basel II decreased to CHF 323.2 billion on 30 June 2008 from CHF 333.3 billion on 31 March 2008. For further details on UBS's implementation of Basel II, refer to the sidebar "Capital requirements under Basel II". Figures by component are as follows:

Capital adequacy
	Basel II		Basel I
CHF million, except where indicated	30.6.08	31.3.08	30.6.07
BIS tier 1 capital	37,500	22,898	46,523
of which: hybrid tier 1 capital	*7,553*	5,787	5,685
BIS total capital	50,670	35,536	58,582
BIS tier 1 capital ratio (%)	11.6	6.9	12.3
BIS total capital ratio (%)	15.7	10.7	15.5
Total BIS risk-weighted assets	323,177	333,300	378,430

Credit risk

RWA for credit risk declined to CHF 252.8 billion on 30 June 2008 from CHF 271.8 billion on 31 March 2008, mainly due to lower RWA for lending, derivatives and repo-style transactions. For further information on credit risk, refer to the "Risk management and control" section.

Non-counterparty related assets

RWA for non-counterparty related assets slightly increased by CHF 0.3 billion to CHF 7.7 billion on 30 June 2008 from 31 March 2008.

Market risk

RWA for market risk increased from CHF 17.5 billion on 31 March 2008 to CHF 19.2 billion on 30 June 2008, mainly due to enhancements to the parameters in the Value-at- Risk model. For further information on market risk, refer to the "Risk management and control" section.

Operational risk

The Basel II capital requirement for operational risk amounted to RWA of CHF 43.4 billion on 30 June 2008, up from CHF 36.5 billion on 31 March 2008. The increase is primarily due to the recalibration of a forward-looking scenario component of UBS's model for quantification of operational risk, mainly reflecting large losses related to operational risk within the financial industry (rogue trading, for example). For further information on operational risk, refer to the "Risk management and control" section.

As they have announced publicly, the Swiss Federal Banking Commission (SFBC) and the Swiss National Bank plan to enhance the capital requirements applicable to UBS and Credit Suisse. The proposals are currently undergoing a short consultation phase, and are expected to be issued in their final form this autumn. The regulators propose to increase the capital buffer (the regulatory capital to be held over and above the minimum established under the Basel II requirements as implemented in Switzerland), and also to introduce a so-called leverage ratio, a minimum ratio between the total balance sheet size and tier 1 capital. According to the SFBC, the measures would be implemented progressively over a number of years. UBS believes that a strong capital base is very important for a well-functioning banking system and for ensuring client trust. This was the reason that UBS has acted so quickly and decisively to raise capital in the course of the market crisis. UBS is assessing the regulatory proposals in close consultation with Swiss authorities.

Segmentation of required capital

BIS risk-weighted assets (RWAs)
	Basel II		Basel I
CHF million	30.6.08	31.3.08	30.6.07
Credit risk ¹	252,848	271,848	344,449
Non-counterparty related risk	7,730	7,433	9,445
Market risk	19,195	17,481	24,536
Operational risk	43,404	36,538	0
Total BIS risk weighted assets	323,177	333,300	378,430
1 Includes securitization exposures and equity exposures not part of the trading book and capital requirements for failed trades.

As they have announced publicly, the Swiss Federal Banking Commission (SFBC) and the Swiss National Bank plan to enhance the capital requirements applicable to UBS and Credit Suisse. The proposals are currently undergoing a short consultation phase, and are expected to be issued in their final form this autumn. The regulators propose to increase the capital buffer (the regulatory capital to be held over and above the minimum established under the Basel II requirements as implemented in Switzerland), and also to introduce a so-called leverage ratio, a minimum ratio between the total balance sheet size and tier 1 capital. According to the SFBC, the measures would be implemented progressively over a number of years. UBS believes that a strong capital base is very important for a well-functioning banking system and for ensuring client trust. This was the reason that UBS has acted so quickly and decisively to raise capital in the course of the market crisis. UBS is assessing the regulatory proposals in close consultation with Swiss authorities.

Capital requirements under Basel II

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.

Under the Advanced Internal Ratings Based Approach (AIRB) applied by UBS, credit 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 over-the-counter derivatives and repurchase-style (repo-style) transactions. For a subset of its credit portfolio, UBS applies the Standardized Approach (SA-BIS), based on external ratings.

Non-counterparty related assets such as UBS premises, other properties and equipment require capital underpinning according to prescribed regulatory risk weights.

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 certain positions, market risk regulatory capital is computed using the standardized method defined by the SFBC.

UBS has developed a model for quantification of operational risk, which meets the regulatory capital standard under the Basel II Advanced Measurement Approach (AMA). It has two main components: the historical component is based on UBS's own internal losses and is used primarily to determine the expected loss portion of the capital requirement (the firm has been collecting operational risk event data since 2002); and the scenario component of the AMA model is used primarily to determine the unexpected loss portion of the capital requirement. The scenarios themselves are generated from an analysis of internal and external event information, the current business environment, and UBS's own internal control environment.

Furthermore, Basel II requires deduction of some positions from eligible capital, most notably goodwill, intangible assets (excluding software), net long positions in non-consolidated participations in financial institutions and first loss positions in securitization exposures.

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 further information on risk categories, refer to the "Risk management and control" section of this report.

Capital components
	Basel II		Basel I
CHF million	30.6.08	31.3.08	30.6.07
Core capital prior to deductions	56,203	39,301	62,956
of which: paid-in share capital	*293*	207	207
of which: share premium, retained earnings, currency translation differences and other elements	*48,357*	33,307	57,064
of which: non-innovative capital instruments	*1,934*	298	367
of which: innovative capital instruments	*5,619*	5,489	5,318
Less: goodwill & intangible assets ¹	(13,510)	(13,112)	(13,800)
Less: other tier 1 deductions ²	(4,182) ³	(2,119) ³	(2,633)
Less: other Basel II deductions ⁴	(1,012)	(1,172)	â€“
Total eligible tier 1 capital	37,500	22,898	46,523
Upper tier 2 capital	1,102	1,044	293
Lower tier 2 capital	13,079	12,766	13,303
Less: Basel I deductions ⁵	â€“	â€“	(1,537)
Less: other Basel II deductions ⁴	(1,012)	(1,172)	â€“
Total eligible capital	50,670	35,536	58,582
1 Includes under Basel I only goodwill and the portion of 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) and for not yet vested or 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.