UBS May Leave Switzerland Unless Regulators Reduce Capital Demands

Union Bank of… Dubai?

That’s a very real possibility for the largest Swiss bank, one which after it was handed Credit Suisse on a silver platter is now several orders of magnitude bigger than its host nation, Switzerland. And the reason is that said host nation is starting to make UBS nervous with its capital demands, so it’s time UBS – or soon to be UBD – shows who’s boss.

According to Bloomberg, UBS Group is examining the potential relocation of its headquarters if Switzerland sticks to its demand that the bank hold an extra $25 billion in capital. 

Based on internal calculations showing that the bank’s key capital ratio – which got billions in taxpayer funds during the whole Credit Suisse bailout because Switzerland was smart enough to realize that giving UBS a few billion as M&A kicker would be much cheaper than sifting through the fallout from a Credit Suisse liquidation – would rise to around about 20% in the harshest scenario from around 14% now, executives believe that remaining in Switzerland would make the group uncompetitive relative to global rivals.

Which to the bank which is far, far bigger thanks to the generous taxpayers of its (perhaps soon former) host nation, is unacceptable.

Meanwhile, the Swiss government and regulators are pushing for the nation’s largest bank to fully deduct the value of its foreign subsidiaries from the capital of the parent bank, a step officials see as necessary to prevent a repeat of the 2023 collapse of Credit Suisse, a collapse which only happened because Switzerland allowed its two largest banks to become about 10x larger than its GDP. 

And while Switzerland wants to avoid the financial devastation that would ensue from UBS ever failing (as an aside, if UBS ever failed, it would take down not just Switzerland but all of Europe) the bank sees the plan as an unfair overreaction after it stepped in to rescue its former rival two years ago.

Meanwhile, realizing it has all the leverage in any showdown with a host nation that is entirely dependant on the bank’s goodwill, UBS now views the proposal as so detrimental that it would have no choice but to relocate its headquarters, with a Bloomberg source stressing that “a potential departure was not a threat but rather a reflection of the commercial impossibility of operating at such a high capital level.” Another person said the bank would face pressure from shareholders if it accepted a much higher capital requirement than normal in other regions. 

That said, before buying up property in Dubai in expectations of flipping it to Swiss high net worth managers in a few years, maybe wait a little first: Bloomberg reported that first the bank will step up lobbying efforts as the proposal begins its passage through the Swiss parliament. A draft is due to go before lawmakers in May, although any change would likely not be implemented before 2028. As such, UBS’s heightened, if largely performative, “concern” may not translate into any action, and the long timeframe for the discussion gives ample time for compromise to be reached.

“We will make our case until the last minute in making sure people understand not only the risk we may pose, but also the benefits we create for the country,” he said. Ermotti said that moving away was “not a topic” for him at that stage.

In recent days however the regulator Finma and the Swiss National Bank have reiterated their insistence that UBS should fully back its foreign units. Finma head Stefan Walter said in an interview with Bloomberg this week that he’d be open to allowing UBS to make the changes over a number of years.

That suggestion has been received at UBS with little enthusiasm, according to the BBG report. A phase-in would be only marginally helpful since investors tend to price in regulatory changes as soon as they are announced, even if they are not introduced for some time, two of the people said.

Moving its headquarters abroad would be a massive rupture for UBS, whose more-than-160-year history has been inextricably linked to the fortunes of the country, not to mention laundering money for countless criminal oligarchs, pardon “numbered accounts”, over the years and would likely face many obstacles. 

The lender’s brand heavily relies on Switzerland’s appeal as a haven for the money from the ultra rich. Then again, with Dubai enjoying an even greater appeal as such a haven, the odds of the bank moving to this particular Emirate are certainly non-zero.

Bloomberg’s sources declined to say what UBS’s alternative base would be. Its businesses include a Swiss domestic bank, firmly anchored in its home market, and a global wealth-management unit that has long benefited from its Swiss identity. UBS also operates an investment bank and an asset management division. 

The pushback by UBS against the state comes 16 years after the bank was bailed out by the Swiss government during the 2008 financial crisis. It appears to have forgotten that.

The Swiss government is now seeking to make their one remaining global bank both bulletproof and able to be wound down safely in the event of another Credit Suisse-like crisis. Earlier this week Finance Minister Karin Keller-Sutter said that the government would not allow itself to be swayed by UBS’ efforts to push back.