ZURICH (Reuters) -The Swiss National Bank on Thursday warned the economic outlook is highly uncertain due to trade and geopolitical tensions, and said Swiss regulatory weaknesses should be addressed to make the nation's top bank UBS more resilient.

"Several risk factors could amplify the impact of potential negative shocks on global economic and financial conditions," the SNB said in its 2025 Financial Stability Report.

The risks include public debt being near historical peaks around the world, high global valuations of residential real estate and corporate bonds, and the U.S. stock market still appearing stretched, the SNB said.

In Switzerland, banking sector profitability improved in 2024, powered by UBS, the SNB, which also cut interest rates to zero on Thursday, noted in the report.

Capital ratios remained broadly stable, capital buffers reflected significant loss-absorbing and lending capacity, and banks' substantial liquidity buffers contributed to their resilience, the report said.

However, regulatory weaknesses remained and should be addressed to strengthen the financial system, the SNB said, backing the Swiss government, which earlier this month set out measures aimed at preventing future crises.

The loss potential for UBS, which acquired rival Credit Suisse in 2023 to become Switzerland's sole remaining big bank, remained substantial under various stress scenarios, the central bank said.

Among other steps, the government proposed that UBS's participations in its foreign subsidiaries would have to be fully deducted from its Common Equity Tier 1 capital.

"From a financial stability perspective, this approach is the best solution," the SNB said.

In its report, the SNB also warned that "some banks may also face the risk of liquidity shortfalls in foreign currencies."

"It is essential that these banks maintain adequate foreign currency liquidity buffers and that they have sound risk management practices in place to address these risks," it added.

Reuters reported in May that the European Central Bank asked some of the region's lenders to assess their need for U.S. dollars in times of stress and worried about potential liquidity mismatches in their balance sheets.

(Reporting by Ariane Luthi and Miranda Murray, additional reporting by Stefania Spezzati; Editing by Friederike Heine, Dave Graham and Tomasz Janowski)

By Ariane Luthi