UBS prepares for Switzerland’s ‘too big to fail’ regulation; EU banks at ESG rule disadvantage, warns industry group
As reported by Reuters, the Swiss government is due to publish its proposals for regulating banks this month that are deemed “too big to fail”, potentially subjecting UBS, as the country’s only remaining big bank, to stricter operational standards.
The forthcoming report is expected to scrutinise capital requirements, with UBS potentially facing the need to allocate tens of billions of dollars in extra funds to mitigate risks similar to those observed in the Credit Suisse crisis.
A motion backed by the Swiss lower house of parliament in May 2023 has called for a leverage ratio of 15 per cent, exceeding standards in the EU, US and UK. UBS has a leverage ratio of 4.7 per cent based on its common equity Tier 1 capital.
In an interview with Reuters, Andreas Ita from consultancy Orbit36 warned that UBS may need to find an additional $100bn in equity. “This can’t be done within a reasonable period by withholding profits, and raising such sums via capital markets is hardly realistic,” he said.
While few analysts expect such stringent mandates to materialise, UBS has embarked on an extensive lobbying campaign, aiming to sway policymakers in its favour.
Colm Kelleher, UBS’s chair, highlighted the potential repercussions of excess capital requirements in a recent interview with Swiss newspaper NZZ am Sonntag, stating they would inflate costs for shareholders and customers alike.
In a speech to parliament last year, Swiss finance minister Karin Keller-Sutter said that stricter capital requirements were coming. However, she also warned that excessive regulation might impede Switzerland’s capacity to rival other financial hubs such as New York, London, Singapore and Dubai.
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As reported by Bloomberg, the warning from the region’s main bank lobby coincides with the European Central Bank increasing pressure on banks to address ESG risks in their operations, especially in loan-loss provisions.
The ECB is seeking evidence that banks have the capacity to manage losses arising from what it terms “emerging risks”, including factors such as clients’ carbon emissions and rising costs linked to natural resource consumption.
In the EU, banks face new regulatory measures including ESG-adjusted capital requirements and strict disclosure rules. However, in the US, planned regulations on ESG are being reconsidered amid Republican-led opposition.
Denisa Avermaete, senior policy adviser for sustainable finance at the EBF, told Bloomberg that ESG buffers are problematic because they are an “exclusively European tool”.
Avermaete added that the EBF is concerned about the prospect of European banks needing to allocate financial reserves for risks that are challenging to assess before receiving precise regulatory instructions, which she said could result in “double counting”.
Bloomberg noted that European banks are lagging behind their American counterparts in terms of investor confidence: JPMorgan has a market value of nearly twice the value of its assets according to Bloomberg data. In contrast, BNP Paribas, the largest bank in the EU, has a price-to-book valuation of 0.7, indicating that investors perceive its worth to be lower than the value of its assets.
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According to Sky News, the UK subsidiary of Spain’s largest bank last week served notice of its intention to quit the Lending Standards Board, a self-regulatory body that aims to set benchmarks for fair lending practices.
In a letter to the LSB, seen by Sky, the bank cites the establishment of the City watchdog’s Consumer Duty and impending fraud reimbursement rules overseen by the Payment Systems Regulator as rendering the LSB’s standards redundant.
“This inevitably leads to duplicative regulation and can create confusion among staff and customers about which standards apply,” Santander wrote.
Anna Roughley, the LSB’s head of insight, told Sky: “Registration with the Lending Standards Board enables financial services firms to send a clear signal that they are committed to achieving the right customer outcomes where there are heightened risks to customers or an absence of statutory regulation.
“We work closely with regulators and our registered firms to drive needed improvements in customer outcomes, and to ensure our standards and codes add value to the UK’s wider regulatory environment.”
In its letter to the LSB, Santander stressed that its withdrawal “in no way implies any intention to reduce the standards of consumer protection we provide — indeed, quite the opposite”.
According to Sky, several other major banks are considering similar exits from the LSB following Santander UK’s decision.
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UBS announced today that its Japanese joint venture with Sumitomo Mitsui Trust Wealth Management will acquire Credit Suisse’s wealth management business in Japan following the Swiss bank’s rescue of its troubled rival in 2023.
In a statement, the Swiss lender said that the partners would adjust their investments in the joint venture to uphold the original ownership structure, with UBS holding 51 per cent and Sumitomo holding 49 per cent. This rebalancing follows the acquisition of additional Credit Suisse client assets in Japan resulting from UBS’s merger with Credit Suisse.
Zenji Nakamura, president of UBS Sumi and UBS’s Japan country head, remarked that the agreement “also underscores the belief both of our firms have in Japanese wealth management itself”.
