Three years after Credit Suisse’s spectacular implosion, Switzerland is finally putting the regulatory concrete around its banking sector. The Swiss Federal Council on April 22 adopted a sweeping revision of the Banking Act and amended its Capital Adequacy Ordinance, targeting the “too big to fail” framework that, as it turned out, was not quite big enough.
The centerpiece of the reform: systemically important Swiss banks must now fully back their foreign subsidiaries with Common Equity Tier 1 capital at the parent level. For UBS, the only bank that really matters in this conversation after absorbing Credit Suisse, that translates to an estimated $20B in additional capital requirements.
The CET1 hammer
CET1 capital is the highest-quality form of bank capital, essentially equity and retained earnings that can absorb losses without the bank needing to shut its doors. The new mandate specifically addresses a vulnerability exposed during the Credit Suisse crisis: parent banks operating sprawling international networks without sufficient capital ringfenced at home to cover potential losses abroad.
UBS has pushed back, raising concerns about competitiveness. The Swiss National Bank, however, has signaled that UBS remains well-capitalized and can absorb the new requirements without operational disruptions.
