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 risk-weighted assets (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 Swiss Financial Market Supervisory Authority (FINMA; until 31 December 2008, Swiss Federal Banking Commission), which lead to higher risk-weighted assets compared with BIS guidelines.

Developments

As publicly announced, FINMA enhanced in fourth quarter 2008 the capital requirements under Basel II, Pillar 2, for UBS and Credit Suisse. The new regulatory measures will have to be implemented progressively until full applicability on 1 January 2013.

First, FINMA will increase the capital buffer (the regulatory excess capital expected to be held over and above the regulatory minimum requirement) from previously 20% to 50-100% over the cycle. At the same time, FINMA will allow for enlarged recognition of hybrid capital.

Second, FINMA will introduce a minimum leverage ratio, defining the minimum amount of tier 1 capital required for a given balance sheet size. For this calculation, the IFRS balance sheet is adjusted for a number of factors: replacement values determined according to the rules of IFRS are substituted by the corresponding values under Swiss Generally Accepted Accounting Principles (Swiss GAAP), allowing for increased recognition of netting benefits, similar to US GAAP. Moreover, the Swiss loan book, certain cash and balances with central banks and specified reverse repurchase agreements where the repurchase price is payable in Swiss francs will be excluded from the balance sheet. Furthermore, a number of adjustments will be made to avoid double-counting of assets that are already deducted from tier 1 capital, most notably goodwill and intangible assets. FINMA will require a minimum leverage ratio of 3% on Group level, with an expectation that the ratio will be well above the minimum requirements in normal times.

The table below shows the calculation of the FINMA consolidated leverage ratio as of 31 December 2008.