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Impact of newly proposed Swiss capital rules on UBS
- UBS to be compliant with newly proposed Swiss capital requirements on a phase-in basis at inception
- Will use the four year transitional period to comply with the fully applied requirements
- Targeted capital return payout ratio of at least 50% of net profit1 unchanged
Zurich, 21 October 2015 – The Swiss Federal Council today proposed stricter capital rules for global systemically relevant banks, making the Swiss regime by far the most demanding in the world on a relative basis.
The Swiss government's proposal sets out a targeted going concern leverage ratio of 5% to qualify as well capitalized including at least 3.5% common equity Tier 1 (CET1) and up to 1.5% high-trigger additional tier 1 (AT1) capital. The proposal includes transitional arrangements until at least the end of 2019 to ensure Tier 1-equivalent treatment for existing high and low-trigger Tier 2 and low-trigger AT1 instruments (currently already eligible as loss absorbing capital for Swiss systemically relevant banks under existing too big to fail (TBTF) legislation). Furthermore, the proposal includes an additional gone concern requirement of 5% of the bank's leverage ratio denominator to be met with bail-in (total loss absorbing capacity, TLAC) instruments, which will continue to change the overall funding mix of the firm. Any high and low-trigger Tier 2 and low-trigger Tier 1 instruments remaining after 2019 will qualify as gone concern capital.
Since 2011, capital strength has been a foundation of UBS's strategy. The firm has almost halved the bank's risk-weighted assets and significantly reduced the size of its balance sheet over the past four years. UBS already has the best capital position among large global banks and operates a strong, successful and highly capital generative business. In addition, the firm has heavily invested in and implemented significant steps to improve the resolvability of the Group by changing its legal structure, business model and risk profile. The substantial progress of the bank, including the removal of explicit and implicit state support, has been positively recognized by rating agencies, equity and debt investors as well as other market participants. UBS intends to meet the newly proposed CET1 leverage ratio requirement of 3.5% by retaining sufficient earnings, while maintaining its commitment to a capital return payout ratio of at least 50% of net profit. UBS will be compliant with the newly proposed rules on a phase-in basis at inception and intends to use the four year period to fully implement the new requirements.
UBS plans to continue its issuance of AT1 instruments and total loss absorbing capacity (TLAC) eligible senior debt to meet the new requirement without the need to increase the overall funding necessary for the Group. Subject to market and other conditions, the firm currently expects to replace maturing UBS AG senior debt with UBS Group AG TLAC eligible senior debt, and maturing Tier 2 instruments with UBS Group AG AT1 issuance. As previously TBTF-compliant AT1 and Tier 2 instruments will be eligible for capital treatment under the new regime on a grandfathered basis, UBS does not intend to use today's announcement of changes in the TBTF-regime as a trigger to exercise its right to call outstanding Tier 2 loss absorbing notes. Our total level of TLAC issuance will be affected by a capital rebate that UBS expects to receive for its already executed reduction in total exposure, (leverage ratio denominator), and its improved resilience and resolvability. The amount of this rebate, which can be up to 2% of LRD and 5.7% of RWA, is, however, still not clear.
To mitigate the additional substantial costs associated with the requirements to hold higher levels of equity and debt, the bank will continue to seek opportunities to reduce costs, to optimize its balance sheet, and to reflect the increased cost of capital in its pricing of products and services.
UBS has endorsed revisions to the already leading capital regime in Switzerland and supports the cornerstones of today's proposal. The firm will contribute to the consultative process regarding the details of the implementation. It will provide comments on the still to be conducted assessment of the proposal's impact on the Swiss economy, the consequences for its competitive position as a globally operating bank headquartered in Switzerland and international developments in capital standards.
UBS Group AG
Switzerland: +41-44-234 41 00
Switzerland: +41-44-234 85 00
UK: +44-207-567 47 14
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1 Subject to UBS maintaining the fully applied Basel III CET1 capital ratio of at least 13% and at least 10% post-stress.