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Swiss government proposes tougher capital rules for UBS

post-Credit Suisse takeover

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New rules could require additional $26 billion in capital

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UBS executives warn bank's competitiveness may suffer

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Reforms also aim to strengthen regulator, enhance

liquidity

access

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Shares jump after proposals made public

(Adds more details on share price in paragraph 3, updates

headline)

By Ariane Luthi and Oliver Hirt

BERN, June 6 (Reuters) - The Swiss government on Friday

proposed stricter rules for UBS following its takeover

of Credit Suisse, which could make it hold $26 billion more in

core capital, confirming some of the bank's worst fears about

incoming new regulations.

The key proposal, which the bank would have six to eight

years to prepare for after it became law, is that UBS must fully

capitalise its foreign units, confirming what many analysts,

lawmakers and executives had been expecting.

UBS shares, which have lagged European peers amid

uncertainty about the new rules, jumped after the proposals were

made public on Friday afternoon, rising by more than 6% and on

track for their best day since May 2024.

The government said its capital requirement proposal would

allow UBS to reduce its holding of Additional Tier 1 (AT1) bonds

by $8 billion. Today, UBS must only 60% capitalise its foreign

units and can cover some of the capital with AT1 debt.

UBS executives say the additional capital burden will put

the Zurich-based bank at a disadvantage to rivals and undermine

the competitiveness of Switzerland as a financial centre.

Such was the shock in Switzerland over the 2023 collapse of

Credit Suisse that top politicians led by Finance Minister Karin

Keller-Sutter vowed to introduce more robust rules that would

protect taxpayers and prevent another meltdown in future.

Keller-Sutter now holds Switzerland's rotating one-year

presidency and Friday's announcement will start a long period of

political wrangling over the measures, which the governing

federal council called "targeted and proportionate."

"They strengthen trust in the financial centre, which, in

the view of the federal council, is central to its stability and

competitiveness," the council said in a statement.

A parliamentary inquiry last year noted that since UBS

bought Credit Suisse for 3 billion Swiss francs ($3.65 billion)

in March 2023, it has had a balance sheet bigger than the Swiss

economy, and urged the government to take the foreign units into

account.

The federal council said it would present drafts on the

proposals for consultations with stakeholders in the second half

of 2025. Finance Ministry officials say laws requiring

parliamentary approval will not enter force before 2028.

Separate measures known as ordinances that can be issued

directly by the government could apply from the start of 2027.

A six to eight-year transition period looked appropriate for

UBS to meet new rules on capitalising foreign units from when

they come into force, the government said.

That could give the bank until the mid-2030s to comply.

POSSIBLE TARGET?

Sources inside the bank have warned the new regulations

could make UBS an appealing takeover target.

Under the Swiss proposals, UBS's Common Equity Tier 1 (CET1)

capital ratio could end up somewhat higher than those of global

rivals, the government said. UBS's CET1 ratio of 14.3% could

rise up to 17%, above rivals like JPMorgan ( JPM ) at 15.8%,

Morgan Stanley ( MS ) at 15.7%, and 15.3% at Goldman Sachs, it

said.

Shares in UBS rose more than 60% in the 12 months following

its acquisition of Credit Suisse. But the stock has since

sharply underperformed; UBS shares have lost about 5% in the

past year, while a top European banking index climbed

37%.

Analysts say the new regulations could trigger a rejig of

UBS's business model, which now focuses on growth in the United

States and Asia. To take the edge off the rules, the bank may be

tempted to sell some assets, banking experts say.

The Swiss government also set out piecemeal reforms to

bolster the market regulator FINMA, which was heavily criticised

for its response to the Credit Suisse collapse.

These include measures aimed at holding bankers to account,

giving the regulator the power to impose fines and making it

easier to restrain pay and claw back bonuses. Still, the

proposals come years after the European Union introduced similar

measures in the wake of the 2007-2009 financial crisis.

The government also proposed making it easier for banks to

access liquidity from the Swiss National Bank. Barriers to

transferring collateral to the SNB will also be removed.

($1 = 0.8222 Swiss francs)