Capital management

On 1 January 2008, UBS adopted the Basel II capital framework of the Basel Committee on Banking Supervision of the Bank for International Settlements (BIS). For credit risk, UBS applies the Advanced Internal Ratings Based (AIRB) Approach under which risk weights are determined by reference to internal counterparty ratings and loss given default estimates. For a subset of its credit portfolio, UBS applies the Standardized Approach (SA-BIS), based on external ratings. Non-counterparty-related assets (UBS premises, other properties, equipment, etc.) 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. Capital charges for operational risk are determined according to the Advanced Measurement Approach (AMA).

To allow for comparability, published RWA are determined according to the rules of the BIS Basel II framework. UBS's regulatory capital requirements are based on the regulations of the SFBC, which lead to higher risk-weighted assets compared with BIS guidelines.

Developments

As publicly announced, the Swiss Federal Banking Commission (SFBC) and the Swiss National Bank (SNB) plan to enhance the capital requirements for UBS and Credit Suisse. In a two-pronged approach, the SFBC proposes to increase the capital buffer (the regulatory excess capital expected to be held over and above the regulatory minimum requirement) and to introduce a minimum leverage ratio (ratio of tier 1 capital to adjusted balance sheet size). The SFBC intends to issue a final decree by year end, after consultation with the two banks. According to the SFBC, the measures will have to be implemented progressively over a number of years. UBS believes that solid capitalization is of great importance for a well-functioning banking system and for ensuring client trust.

In July 2008, the Basel Committee on Banking Supervision issued consultative documents on proposed revisions to the Basel II market risk framework. Broadly, the committee aims at addressing perceived shortcomings of the current VaR framework by introducing new capital charges for price risks that are incremental to any default and event risks already captured by VaR models used by banks. The committee expects banks to implement the proposed revisions in a two-stage process due for completion by 1 January 2010 and 1 January 2011.