The first episode of this saga dates back to our in-depth analysis on April 3, where we focused on the stages of integration between Credit Suisse (CS) and UBS against the backdrop of the recapitalization of approximately $25 billion requested by the Swiss government from the new bank created by the merger of the two Swiss giants. In reality, this measure is part of a broader package of reforms – already dubbed “too big to fail,” borrowing the expression from the well-known phrase, whose authorship is unknown to us, which came to the fore during the 2008 crisis – presented by the Swiss government on June 6, aimed at strengthening the Swiss financial system by preventing a bank with deposits exceeding Switzerland’s GDP from dragging the country into serious trouble in the event of a crisis at the institution itself. This package specifically provides for:
● Stricter measures on the liquidity of banking institutions
● Broader powers granted to FINMA
● Guidelines on capital quality
These measures are detailed on the Swiss Confederation’s website dedicated to the Too Big to Fail reform, but essentially they aim to ensure more accurate monitoring of the liquidity obtained by banks, especially when it comes from central banks, as well as giving more tools to FINMA, which has been accused of completely failing in its mission in the case of CS, with ongoing controversy over whether or not it had the necessary powers to act effectively. Finally, there are measures on capital quality that affect how banks quantify items such as deferred tax assets, internal software, and other items in their balance sheets. This last measure in particular would raise UBS’s capital requirements by only $3 billion, but would be in addition to the $26 billion estimated by the Swiss government (compared to the $24 billion estimated by UBS).
This package, as it stands, is not a tailor-made law, even though it is undeniably tailored to UBS, which, due to its size, is unique in the Swiss financial landscape. It is therefore not surprising that the clash is between the bank’s top management and the federal political authorities. In addition to the numbers, the battle is also being fought over timing. On Monday, September 15, the Council of States will vote on whether or not to combine measures concerning capital quality with the Too Big to Fail package, with strong pressure to postpone it as a subject for ad hoc approval.
The finance department said in June that the overall reforms would come into force “at the earliest” in early 2028, while UBS would have a transition period of “at least six to eight years” to implement the changes once the legislation came into force.
The Council of States voted narrowly against the merger last week, which means that if the National Council does the same, the government’s timetable will remain unchanged. If, on the other hand, it votes in favor of merging the reforms in Parliament, they will return to the Council of States for discussion.
Watering down the timetable means creating a fast track for UBS compared to the rest of the financial system, for which Too Big to Fail would come into force according to the government’s timetable: However, what is at stake is the transfer of UBS’s registered office abroad at a time when the Swiss financial center, after almost two decades of difficulties, has managed to confirm assets under management of more than CHF 9 billion, close to its all-time high. Needless to say, much of this mass is managed by UBS, whose stock has risen by a remarkable 50% since its April lows.
To be continued…
Disclaimer
This post expresses the personal opinions of the Custodia Wealth Management staff who wrote it. It does not constitute investment advice or personalized advice and should not be considered an invitation to carry out transactions in financial instruments.
