Tackling the State Guarantee for UBS: The Federal Council Proposes New Regulations to Reduce Risk and Reclaim Bonuses

The Federal Council discussed the issue of dealing with “systemically important” banks, particularly UBS, in a report presented on Wednesday. Some proposed measures include stricter equity capital requirements, more liquidity requirements, increased powers for the supervisory authority, legal responsibility for high-ranking bank officials, and the ability to reclaim bonuses in a crisis. These suggestions aim to strengthen the financial system and reduce the need for a state guarantee in the event of a bank’s bankruptcy.

Small changes in regulations can have significant impacts on banks like UBS. For example, if UBS were required to increase its equity capital from 5 percent to 7 percent, it would need billions of francs in additional capital. However, the core question remains whether these measures can eliminate the de facto state guarantee for UBS and prevent taxpayers from bearing the burden of a bank failure.

Experts like American professor Daniel Tarullo express doubts about winding up UBS and emphasize the importance of strengthening its resilience to reduce the risk of a financial crisis. The Federal Council’s proposals may not fully eliminate the state guarantee for UBS as uncertainties remain about practical implementation of resolution plans.

The government report suggests potential changes in UBS’s capital requirements and resolution planning that economists Aymo Brunetti and Hans Gersbach commend some of these recommendations but stress the importance of credible emergency planning to protect taxpayers. It remains uncertain whether these measures will effectively remove the state guarantee for UBS or if further actions will be necessary to ensure financial stability.