In Bern, the legislative machinery on banking regulation is running at full speed. Yesterday, Finance Minister Karin Keller-Sutter (FDP) attended a meeting of the Council of States’ Economic Affairs and Taxation Committee (EATC-S). The central question was how much capital UBS will be required to hold against its foreign subsidiaries in future.

Instead of reaching a decision, as had widely been expected, parliamentarians engaged in a fundamental debate and postponed the vote until August 31.

Rest of the Package Rolled Out

This fast-tracked capital proposal is the most politically sensitive part of the reform package, the next stage of which the Federal Council set in motion on Wednesday at Keller-Sutter’s request: it sent the broader part of the reform out for consultation.

It complements the capital measures already adopted and, according to the Federal Department of Finance (FDF), is intended to close the gaps identified in the wake of the Credit Suisse crisis:

• A new accountability framework, known as the Senior Manager Regime, will be introduced. Banks covered by the regime will in future have to document who at senior management level is responsible for which decisions.
• For systemically important banks, remuneration rules will include deferral periods and clawbacks for variable bonuses.
• Finma will receive significantly greater powers: it will be able to fine institutions that breach the rules up to 10 percent of their annual operating income, impose daily penalty payments and intervene earlier as part of its early-intervention powers.

Concessions for Smaller Banks

Compared with the key parameters presented just over a year ago, the Federal Council has softened the package in several areas:

• The Senior Manager Regime will no longer apply to all banks, but only to those with at least 250 full-time employees. Finma will, however, be able to subject smaller institutions to the regime on a case-by-case basis.
• Adjustments have also been made to the audit regime: the annual approval of audit firms has been dropped, while mandatory rotation will now apply only after 14 years instead of 10.
• The smallest institutions, in categories 4 and 5, will be completely exempt from the Liquidity Ordinance.

According to the FDF, these changes respond to widespread calls for greater proportionality and lower costs.

UBS to Bear the Bulk of the Costs

For the first time, the FDF has published a comprehensive regulatory impact assessment covering both stages of the reform: the deduction for foreign subsidiaries from regulatory capital, which is already being debated in parliament, as well as the new measures.

For its assessment of the broader economic impact, it draws, among other sources, on an external study by consultancy BSS Volkswirtschaftliche Beratung, while its estimates of capital costs are based on calculations by Professor Heinz Zimmermann and Alvarez & Marsal.

Its conclusion: by far the largest costs will arise from the requirement to fully back foreign subsidiaries with capital – and will therefore fall almost entirely on UBS, Switzerland’s only internationally active global bank.

Based on a static calculation, the bank would have to build up around 9 billion dollar in additional Common Equity Tier 1 capital. The federal government estimates the additional annual costs at between 0,3 billion and 0,5 billion dollar. UBS itself puts the total additional capital requirement higher.

For the other banks, the report says the overall costs will remain low. According to estimates by audit industry association Expertsuisse, the annual cost of the new audit requirements across all supervised institutions will fall from 21,5 million francs to 12,7 million francs. This is due to the longer rotation period, the removal of annual approval requirements and the narrower scope of application.

Lengthy Legislative Process

The consultation will run until November 19, 2026. The Federal Council then intends to submit its dispatch to parliament the following year. The legislative amendments could enter into force at the beginning of 2029 at the earliest, while the new liquidity requirements may not take effect until 2033.

This means that the regulation of Switzerland’s global banks will remain a multi-year project fraught with pitfalls and uncertainties.