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Basel Committee's Esho says it's misleading to focus only

on

bank capital quantity

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UBS has argued against Swiss government's new capital

plans

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Esho says he still expects major financial centres to

implement

Basel III

By Ariane Luthi and Oliver Hirt

ZURICH, May 2 (Reuters) - The head of the world's

banking watchdog said Switzerland's existing rules on bank

capital do not unfairly penalise its lenders versus rivals

elsewhere, pushing back on arguments UBS has made to

oppose government plans to toughen them up.

Under Swiss proposals to make banks hold more capital to

make them safer following the 2023 collapse of Credit Suisse,

UBS has estimated it could need $40 billion in additional

capital compared to where it stood before the emergency takeover

of its former rival.

Neil Esho, Secretary General of the Basel Committee on

Banking Supervision, told Reuters that it was misleading to

focus solely on headline capital requirements when Swiss rules

allowed for more flexibility than other jurisdictions regarding

which financial instruments could count as capital.

The Swiss regulation also permits capital held in

subsidiaries to contribute to the parent bank's requirement,

enabling a possible double counting of capital that Basel rules

caution against, Esho added.

"The higher number is not necessarily more resilient once

you take into account the quality of capital," Esho said in an

interview. "I wouldn't buy the argument that Swiss banks are

necessarily being disadvantaged relative to other banks."

At UBS' AGM last month, Chairman Colm Kelleher said the bank

is already hampered by the existing regulatory "Swiss Finish" -

the specific implementation by Switzerland of international

standards.

"Adding another Swiss Finish on top - while other financial

centres are easing regulations - would harm UBS, the Swiss

financial centre and the broader economy," he said.

Esho, in a speech in January, said he favoured quality of

capital over quantity while briefly mentioning Switzerland, but

the comments to Reuters are his most explicit yet and will feed

into the debate ahead of the Swiss government formally proposing

new capital rules in June.

Esho also stressed that it was not his place to advise on

what governments should do.

The Basel Committee, which sets global minimum requirements

for banking supervision, revised its standards after the

2007-2009 financial crisis.

The European Union, Britain and the United States have

recently delayed the roll-out of Basel III, the latest

iteration, increasing the concerns of UBS executives that

Switzerland will be imposing uncompetitive demands.

But Esho said he expected major financial centres would all

implement Basel III eventually.

MORE CAPITAL

UBS had to hold 14.82% of risk-weighted assets as Tier 1

capital last year, more than Deutsche Bank's 13.20%,

but below U.S. rival Morgan Stanley's ( MS ) 15%.

Analysts say the enlarged UBS will need to hold more capital

even before changes to existing rules - Autonomous analyst

Stefan Stalmann estimates a ratio of 16.27% by 2030.

Under an "extreme" form of regulation, UBS's Tier 1 ratio

could climb to 22.4% by then, the bank recently told lawmakers.

However, Esho pointed to Swiss rules that allowed, for

example, a higher share of Additional Tier 1 bonds rather than

core equity Tier 1 capital compared to other jurisdictions.

The supervisor also appeared to support the Swiss

government's plans requiring UBS to hold more capital in

Switzerland.

The Basel Committee framework was designed to ensure that

banks had enough capital over the whole consolidated group, Esho

said. "What it won't do is ensure that you have capital where

you need it in a legal entity," he added.

"The issue in Switzerland is far more important given the

nature of UBS and the size of the U.S. subsidiary relative to

the parent bank."