What Is CET1 Capital?
Common Equity Tier 1 capital is considered the highest-quality form of bank capital.
It primarily consists of common shares and retained earnings and is designed to absorb losses while a bank continues operating.
Because of its strong loss-absorbing characteristics, regulators generally place significant importance on CET1 when assessing the financial strength of major banks.
What Is AT1 Capital?
Additional Tier 1 capital is another form of regulatory bank capital.
AT1 instruments can help banks meet capital requirements but generally have different characteristics from ordinary equity.
Allowing AT1 alongside CET1 could therefore give UBS greater flexibility in how it supports its foreign subsidiaries.
Government Wanted 100% CET1 Backing
The Swiss government has been seeking stricter capital requirements for systemically important banks following the Credit Suisse crisis.
Its proposal would require foreign subsidiaries to be fully backed with CET1 capital.
The objective is to strengthen the resilience of major Swiss banks and reduce risks to the financial system if problems emerge at a foreign subsidiary.
Why UBS Is at the Centre of the Debate
UBS became Switzerland's largest banking group after acquiring Credit Suisse.
The acquisition transformed UBS's size and importance to the Swiss financial system and prompted a wider debate over how much capital the bank should be required to hold.
Swiss authorities have been reviewing the country's banking rules to strengthen safeguards against another major banking crisis.
Committee's Position Creates a Policy Divide
The committee's support for a 50% CET1 and 50% AT1 structure puts it at odds with the government's preference for 100% CET1 backing.
The difference reflects a broader debate over how to balance financial stability with the costs imposed on major banks.
Higher requirements can provide greater protection against losses, but they can also increase the amount of capital a bank must hold and potentially affect its profitability and lending capacity.
What Happens Next?
The committee's position forms part of the ongoing parliamentary process surrounding Switzerland's banking reforms.
The proposed capital rules will continue through the legislative process before any final framework becomes law.
The final outcome will determine how UBS and other systemically important Swiss banks are required to capitalise their foreign subsidiaries.
The Bigger Picture
Switzerland's review of bank capital rules is closely linked to lessons from the Credit Suisse collapse.
Authorities want stronger safeguards around systemically important institutions, while lawmakers are also examining how to ensure the new rules remain proportionate and workable.
For UBS, the final decision could have significant implications for its capital structure and the amount of capital it must allocate to support operations outside Switzerland.
TwikUp Insight
The Swiss Parliament's Economic Affairs and Taxation Committee is supporting a more flexible capital structure for UBS's foreign subsidiaries, with 50% CET1 and 50% AT1 capital under the committee's approach.
The position differs from the Swiss government's proposal for 100% CET1 backing, highlighting an ongoing debate over how Switzerland should strengthen banking safeguards after the Credit Suisse collapse.
