Introduction
Switzerland is taking decisive steps to bolster the safety of its largest bank, UBS, as the nation aims to avoid another financial crisis that might overshadow its economic stability.Context
UBS became Switzerland's sole global bank over two years ago following a government-led rescue of Credit Suisse, which faced significant scandals that threatened to destabilize the market. The abrupt collapse of Credit Suisse sent shockwaves through global markets and highlighted the inadequacies of oversight, which struggled to manage the bank’s continuous crises.Developments
On June 6, Switzerland's president, Karin Keller-Sutter, emphasized that the country would not be caught off guard again during a press conference. She addressed concerns regarding UBS's competitiveness, stating, "I don't believe that the competitiveness will be impaired, but it is true that growth abroad will become more expensive."Keller-Sutter pointed to the lessons learned from previous financial crises in 2008 and 2023, asserting that necessary reforms must be enacted. UBS, which boasts a financial balance sheet of approximately $1.7 trillion, surpasses the Swiss economy, prompting the government’s desire to limit state-backed international growth.
The proposed reforms necessitate that UBS increase its capital reserves to mitigate risks associated with foreign operations, marking a significant departure from previous policies. Keller-Sutter posed a critical question regarding who should bear the risks for overseas growth—the bank, its shareholders, or the state.
The changes could require UBS to set aside an estimated $26 billion in additional capital, which has raised concerns among its leadership. In an internal memo following the announcement, UBS Chairman Colm Kelleher and CEO Sergio Ermotti warned that these reforms could severely impact the bank's "global competitive footprint" and the Swiss economy.
Analysts have suggested that these requirements might shift UBS's growth strategy in markets like the United States and Asia. Andreas Venditti from Vontobel noted that the increased costs of operations could discourage expansion and potentially incentivize a reduction in business size.
The downfall of Credit Suisse has also shattered the perception of Switzerland's financial invulnerability, revealing flaws in strategies designed to prevent state bailouts during crises. Many observers believe these reforms are long overdue. Andreas Missbach from Alliance Sud argued that with the size of UBS overshadowing the Swiss economy, further growth was unsustainable and that the government's resistance to UBS's lobbying efforts is commendable—but not necessarily sufficient.
UBS CEO Sergio Ermotti has argued against the reforms, indicating that a heavy capital burden would hinder the bank's competitive edge in a global market dominated by U.S. firms. He highlighted the disparity in market valuation between UBS and its U.S. counterparts, like Morgan Stanley, whose shares are valued at nearly twice their book value compared to UBS's 20% premium.
Despite these developments, experts like Hans Gersbach of ETH Zurich have raised concerns about the adequacy of the government's measures, questioning the effectiveness of the current plans in the event of future challenges for UBS.