Switzerland’s debate over the future regulation of UBS is entering a decisive phase. On Thursday, the Council of States became the first chamber of parliament to take up the question of how systemically important banks should capitalize their foreign subsidiaries. 

The Council of States did not reach a decision on Thursday.

While the proposed rules formally apply to systemically important banks with subsidiaries abroad, in practice they are primarily about UBS.

The Federal Council wants the book value of foreign subsidiaries to be fully backed by Common Equity Tier 1 (CET1) capital at the Swiss parent company. UBS has repeatedly pushed back against the proposal, arguing that the requirements would put it at a competitive disadvantage internationally.

Now another influential voice has entered the debate.

Pimco, one of the world’s largest fixed-income investors, has outlined its position on the proposed Swiss banking reforms in a statement to finews.

The US asset manager supports efforts to strengthen the resilience of Switzerland’s financial system. At the same time, it argues that policymakers should preserve the country’s international competitiveness as a global financial center.

Pimco Sees a Role for AT1

Within that broader context, the firm addressed one of the key technical questions in the debate: what type of capital should be used to meet the tougher requirements.

«Based on the information currently available, it appears reasonable to consider exploring a mix of CET1 and AT1 capital in meeting any enhanced requirements for the capitalisation of foreign subsidiaries, provided that CET1 remains the majority,» Pimco told finews.

The precise calibration, it added, is ultimately a matter for policymakers.

That puts Pimco closer to the compromise proposed by the Economic Affairs and Taxation Committee of the Council of States than to the Federal Council’s original position.

The committee supports fully deducting foreign subsidiaries from regulatory capital but wants banks to be allowed to meet part of the requirement with Additional Tier 1 capital, or AT1. Under its proposal, AT1 could account for up to 50 percent of the required capital.

The committee approved the overall proposal by seven votes to five, with one abstention.

Search for a Swiss Compromise

The committee has presented its approach as a compromise between the Federal Council’s plans and concerns raised by the cantons, the business community and UBS itself.

At the heart of the dispute is a fundamental question for Switzerland: how much additional high-quality capital should UBS be required to hold at its Swiss parent to cover the risks associated with its foreign subsidiaries – and at what point do those requirements begin to undermine the bank’s ability to compete internationally?

The Federal Council favors full CET1 backing. One minority within the committee supports that approach, while another has proposed a 90 percent CET1 requirement.

The committee majority favors allowing AT1 to cover part of the requirement, while simultaneously changing the framework so that the instruments can contribute to stabilizing a bank earlier in a period of stress.

Earlier Restrictions on Distributions

Under the proposed compromise, a multi-stage mechanism would kick in if a bank falls below specified CET1 thresholds.

Depending on the level of capital, this could restrict coupon payments on AT1 instruments and dividends, halt share buybacks and reduce variable compensation.

The aim is to address one of the key questions surrounding AT1: whether the instruments can absorb losses early enough to strengthen a bank before it reaches an acute crisis.

Pimco is broadly supportive of this approach as well.

According to the asset manager, distribution restrictions linked to clearly defined minimum capital requirements would be broadly consistent with frameworks already used in other major jurisdictions, including the UK and the European Union.

The important caveat is that Switzerland should remain closely aligned with established international practice.

Keeping Investor Confidence in AT1

For Pimco, the debate extends beyond UBS. As a major fixed-income investor, it is also concerned with the credibility and functioning of the international market for bank capital.

Any new Swiss framework, it argues, should remain aligned with international standards and preserve investor confidence in the AT1 market.

That is an important consideration for capital-market investors. The further Swiss rules diverge from established international standards, the more difficult it could become for investors to assess the risk-return profile of Swiss bank capital relative to instruments issued in other jurisdictions.

Pimco is also broadly supportive of proposals to strengthen supervision and Finma’s supervisory powers, drawing on lessons from the events of 2023 and regulatory practices already established in other major financial centers.

«A clear statutory framework, with rules that are transparent and well understood by investors across the capital structure, can help support confidence in the banking system,» Pimco told finews.

Blackrock Also Weighs In

Pimco is not the only international asset manager closely following the Swiss debate. Blackrock has also analyzed the proposals put forward by the Council of States’ Economic Affairs and Taxation Committee, according to a statement published on the company’s website.

The world’s largest asset manager particularly welcomes the proposed greater clarity around when interest payments or repurchases of AT1 instruments may be suspended and under what circumstances these instruments may be converted or exchanged in a crisis.

According to Blackrock, the proposed distribution restrictions are broadly consistent with rules already in place in the European Union and the United Kingdom.

Unlike Pimco, however, Blackrock explicitly refrains from endorsing any specific regulatory outcome regarding the capitalization of foreign subsidiaries. Instead, the asset manager emphasizes the importance of clear and transparent rules for the AT1 market.