BERN, Switzerland: UBS faces a sweeping new capital requirement from the Swiss government, which this week proposed changes that could force the country's largest bank to hold US$26 billion more in core capital following its rescue of Credit Suisse last year.

Under the plan, UBS would be required to fully capitalize on its foreign subsidiaries, a significant shift from the current policy of holding only 60 percent of that capital—and part of it can be in the form of Additional Tier 1 (AT1) bonds. The new rule is part of a broader effort to strengthen the Swiss financial system after the shock collapse of Credit Suisse in 2023.

Despite the anticipated capital burden, UBS shares jumped as much as seven percent on June 6 — their best day in over a year — as investors welcomed long-awaited clarity.

Once the law takes effect, the bank will have six to eight years to comply. The government said the shift could allow UBS to reduce AT1 bond holdings by $8 billion. The proposals confirmed what many executives and analysts had feared: stricter oversight in exchange for systemic safety.

"They're crucial for the stability of the financial sector and hence for protecting the economy and taxpayers," said Finance Minister Karin Keller-Sutter, who currently holds Switzerland's rotating presidency.

The government emphasized the rules would be "targeted and proportionate," and Keller-Sutter noted UBS's final capital requirement may be lower depending on how it responds. A draft law is expected in the second half of 2025, with ordinances potentially kicking in from early 2027. Full implementation may stretch to the mid-2030s.

UBS executives warn that the extra burden could undermine the bank's global competitiveness. According to sources, the bank has studied scenarios, including relocating its headquarters. Keller-Sutter acknowledged the possibility but added, "At the end of the day, that's a company decision."

UBS's Common Equity Tier 1 (CET1) capital ratio, currently at 14.3 percent, could climb to 17 percent, outpacing rivals like JPMorgan (15.8 percent), Morgan Stanley (15.7 percent) and Goldman Sachs (15.3 percent), the government said.

The Credit Suisse acquisition ballooned UBS's balance sheet to exceed the size of Switzerland's entire economy. A parliamentary inquiry had urged the government to factor in foreign operations in future oversight. Since the deal, UBS shares initially rose 60 percent but have underperformed, falling five percent over the past year even as Europe's top banking index gained 37 percent.

Analysts believe UBS may need to restructure its business model. "The first mitigating strategy is to optimize the use of capital," said Antonio Roman, portfolio manager at Axiom. "A second, more disruptive option would be the sale of the U.S. business," which could free up $50 billion in capital.

The government also proposed strengthening FINMA, the market regulator criticized for its handling of Credit Suisse. Planned reforms include imposing fines, restraining pay, and clawing back bonuses — tools already adopted by EU regulators post-2008.

To ease liquidity pressures, the government will also make it easier for banks to access Swiss National Bank funding by removing barriers to transferring collateral.