The collapse of Credit Suisse may give birth to the strictest new capital rules! UBS Group AG (UBS.US) is about to face a moment that will determine the fate of its capital.

Swiss financial giant UBS Group AG (UBS.US) is close to finding out how much billion dollars the Swiss government will detach from its capital buffer. The Swiss government will announce this week an administrative order or key regulation to determine which assets UBS Group AG must exclude from its regulatory capital accumulated total. The government will also propose a draft law as the second cornerstone of its planned comprehensive reform of the Swiss banking industry rules - a law to determine how much additional capital UBS Group AG needs to hold for its overseas business within Switzerland. This will be a key milestone for the Swiss financial industry and its largest commercial bank, UBS Group AG. The Swiss government once stared into the abyss when its long-time competitor, Credit Suisse, collapsed three years ago, and is now seeking to build a solid capital barrier to prevent another financial collapse in the future. For UBS Group AG, the higher capital requirements will undoubtedly constrain its international market expansion capability and its ability to return funds to investors, thereby limiting its operational, growth, and shareholder return strategies. This makes these proposed measures the most pressing issue for UBS Group AG CEO Sergio Ermotti and Chairman Axel Kalesh. News and uncertainties regarding UBS Group AG's capital have been to some extent suppressing the bank's stock price. Investors are generally concerned that the bank's dividends may be affected. However, despite this, in the US stock market, UBS Group AG (UBS.US) ADR price surged over 58% in 2025, significantly outperforming the S&P 500 index. However, so far this year, UBS Group AG's US ADR has fallen over 5%, significantly underperforming the S&P 500 index and the European banking sector benchmark index. If the uncertainties surrounding UBS Group AG's capital lessen, the bank's stock performance may become stronger. The Swiss government or the Swiss Federal Council has proposed excluding software and deferred tax assets from the so-called CET1 capital. UBS Group AG estimates that this move will reduce this indicator by approximately $11 billion in capital liquidity. Bernese authorities (i.e. the Swiss government) also want to see this large commercial bank provide liquidity support for its overseas subsidiaries with 100% CET1 capital. According to UBS Group AG's latest calculations, this would result in an additional capital requirement of approximately $20 billion for the domestic entity UBS Group AG stock company (UBS AG). As of the end of last year, UBS Group AG had approximately $71 billion in CET1 capital. Those familiar with the Swiss government's thinking had previously indicated that the Federal Council would likely propose a weakened version of the regulation to provide some liquidity relief for UBS Group AG. However, they also stated that the Swiss government intends to maintain the legal draft regarding overseas subsidiaries as outlined earlier, which likely means it will submit a bill to Parliament proposing full capital support for overseas subsidiaries. An analysis team from Wall Street financial giant Bank of America Corp has suggested that, in theory, options for weakening the regulation could include allowing certain types of tax assets to continue to be counted towards regulatory capital. Other possibilities include gradually excluding software assets, or gradually implementing the new rules over a number of years. While regulations can be decided solely by the Federal Council, the legal draft regarding overseas subsidiaries requires approval from Parliament. This process is expected to last at least until next year, introducing the possibility of significant modifications as lawmakers hold their formal first closed-door debate on May 4th. UBS Group AG has been actively and intensively lobbying the Federal Council against these proposals and commissioned economic research firm BAK to conduct a study, which was released last week. The study predicts that if the reforms pass as proposed, they could have a negative impact of 11 to 34 billion Swiss francs (approximately $14 to $44 billion) on Switzerland's GDP over the next decade. The Swiss government department responsible for driving the relevant issues, headed by Finance Minister Karin Keller-Sutter, has dismissed UBS Group AG's opposition as exaggerating, while many business and political representatives have called for a certain degree of weakening of these proposals. The country's most powerful political party, the Swiss People's Party (SVP), has also criticized the bill as too harsh, although some left-wing parties advocate for stricter measures. A prominent representative from the SVP, Thomas Matter, hinted last week that if the government decides to weaken the regulations, it could increase the SVP's willingness to seek fewer or even no modifications when the overseas subsidiaries bill enters parliamentary review. A group of center-right MPs, including Matter, proposed a compromise last December, allowing UBS Group AG to use the so-called AT1 capital to partially meet the requirements for overseas subsidiaries; this would result in lower costs for shareholders compared to CET1 capital. However, Keller-Sutter rejected this proposal. The regulation and legal draft are part of a large-scale financial regulatory reform initiated by Switzerland in early 2023 after the near-collapse of Credit Suisse. At that time, the Swiss government facilitated UBS Group AG's acquisition of Credit Suisse, thereby avoiding what could have evolved into a comprehensive financial collapse. After completing this transaction, UBS Group AG's size increased further, meaning that any crisis at the bank would be even more difficult for Switzerland to handle. The overview of the Swiss capital proposal shown above will greatly increase UBS Group AG's capital requirements, but the final form is still unclear. An analysis report published by Bank of America Corp analysts last month shows that the government will propose a weakened version of the regulation, while a legal draft will maintain the proposed content unchanged. They also suggest that the bill is likely to be further diluted by Parliament afterwards. The existing regulation proposal will completely exclude software and deferred tax assets from CET1 capital. It will also take an extremely conservative approach to the framework for so-called prudent valuation adjustments, which will further reduce the capital levels of UBS Group AG and other Swiss Financial Institutions, Inc. CET1 capital, or Common Equity Tier 1 capital, is considered the highest quality capital for banks and is the first capital to be depleted in case of losses. It is compared to assets weighted by perceived risk to determine the CET1 ratio, which is the most closely watched regulatory metric in the banking industry as it determines the maximum limit for a bank's ability to return funds to investors.