By Justin Cash

Of Financial News

Swiss authorities are facing significant pushback against plans to force UBS to hold more reserves, as regulatory experts question whether upping capital requirements will be enough to avoid the next crisis.

On April 10, the Swiss government outlined a package to safeguard what is now the pivotal asset in its banking system after UBS rescued ailing rival Credit Suisse last year.

UBS could face a capital hike of some $25 billion under the plan based on a worst-case scenario of another market shock. The package could also give the Swiss financial regulator tougher clawback powers on bonuses and the ability to levy unprecedented fines.

UBS and its chair Colm Kelleher have consistently said more capital wouldn't make the bank safer, but the costs would be passed on to clients and would limit buybacks that would prop up the share price for investors.

UBS shares fell in the aftermath of the announcement.

"The Swiss regulator appears to have forgotten the key learning from Credit Suisse, which is that a strong capital position is critical, but not enough on its own to maintain investor confidence," Jerry del Missier, founder of Copper Street Capital and former chief operating officer of Barclays, said.

"Implementing a punitive capital requirement is counterproductive to the stability of the institution, and does little to enhance confidence in the markets it purports to protect," he said.

"The potential for this to actually damage UBS in the long-term is, by no means, a foregone conclusion--there's still a range of outcomes at play. Nevertheless, it may have taught UBS a valuable lesson about how landing a windfall by outplaying your regulator isn't the victory you think it is," he added.

Johann Scholtz, equity analyst at Morningstar, said: "UBS is overcapitalized as it stands, so we don't expect it to have to raise capital, but it could limit UBS's dividend payouts and share buybacks."

Switzerland's finance ministry declined to comment.

UBS and investors face a long period of uncertainty until the rules are finalized in the first half of next year, before coming into force in 2026.

Noma Mkwananzi, a prudential regulation specialist at compliance consultancy Bovill, said: "While increasing capital reserves is a prudent measure, it's essential to acknowledge that the failure of Credit Suisse wasn't solely due to capital or liquidity issues."

"Instead, it stemmed from a combination of risk management shortcomings, regulatory oversights, and strategic errors... While increasing capital requirements may be necessary in specific areas, there is also an opportunity to reinforce regulation without solely relying on capital injections," she said.

"It is also crucial to strike a balance between regulatory demands and the competitiveness of banks like UBS. Excessive increases in capital requirements could undermine UBS and Switzerland's global competitiveness and burden consumers with higher costs," she added.

Financial News is owned by News Corp, the parent company of The Wall Street Journal and Dow Jones Newswires.


(END) Dow Jones Newswires

04-24-24 0520ET