Capital management

In July 2009, the Basel Committee on Banking Supervision issued enhancements to the Basel II framework and revisions to the Basel II market risk framework. Banks are expected to comply with the revised requirements by 31 December 2010.

The enhanced Basel II framework introduces higher risk weights for resecuritization exposures, better reflecting the risk inherent in these products, and requires banks to conduct more rigorous credit analyses of externally rated securitization exposures.

The revisions to the Basel II market risk framework aim to address perceived shortcomings in the current Value at Risk (VaR) framework, most notably by introducing new capital requirements to incorporate effects of "stressed VaR", by introducing a new incremental risk charge that accounts for default and migration risk of trading book positions, and by requiring that banking book capital charges will apply to trading book securitization positions. Furthermore, the committee also issued valuation guidance for all illiquid positions accounted for at fair value.

As disclosed in UBS's fourth quarter 2008 financial report, the Swiss Financial Market Supervisory Authority (FINMA) introduced a minimum leverage ratio and higher target capital ratios for the two largest Swiss banks. Recent public statements by FINMA officials and by the Swiss National Bank suggest that Swiss authorities are actively considering what measures should be taken, including measures relating to capital, liquidity and structure, to reduce the systemic risk associated with Switzerland's two largest banks. It would be premature to speculate whether these considerations will lead to further policy changes, and what effect such changes might have on UBS's business and strategic direction.