Two years ago, UBS acquired its competitor, Credit Suisse, after the bank stumbled badly following years of allegations of money laundering, tax evasion and mismanagement of foreign bank accounts that enabled account owners to skirt regulatory responsibilities.
Sold to UBS at a fire sale price of $3.2 billion, UBS took risks in acquiring the 166-year-old institution, betting that what it did not yet know about Credit Suisse’s entanglements would not cause problems in the long run. UBS had already set aside $511 million to pay the fine related to a recent tax evasion plea deal that Credit Suisse made with the U.S. Department of Justice.
In June, the Swiss finance minister announced steps being taken to avoid another financial crisis like the one involving Credit Suisse, and earlier difficulties experienced by UBS after its questionable service expansion. During that rough patch, UBS turned to the Swiss government for help. At present, it appears that the same government no longer wishes to be the backup for banks that make missteps.
As a result, UBS must hold another $26 billion in core capital and an additional $18 billion in new capital. The new capital is intended to cover risks the bank takes in foreign markets. The measure may also effectively limit the growth of the bank going forward.
In a statement, UBS responded, “UBS supports in principle most of the regulatory proposals the Swiss Federal Council published today. However, UBS strongly disagrees with the extreme increase in capital requirements that has been proposed. These changes would result in capital requirements that are neither proportionate nor internationally aligned.”
The bank also noted, “UBS will also evaluate appropriate measures, if and where possible, to address the negative effects that extreme regulations would have on its shareholders.”
UBS will almost certainly work to negotiate with the Swiss government to lessen the severity of the new capital rules. The anticipated benefits of the Credit Suisse acquisition could be somewhat eclipsed by the new regulations. At present, UBS might not be able to reach the full capital requirement until 2033.
While some compromise may be brokered, the Swiss government is not likely to back down on its efforts to move out of the shadow of the financial crises that have rocked Switzerland’s reputation as a financial capital by ensuring UBS, a bank “too big to fail,” can manage on its own—even if by limiting its growth and competitive position.
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