Swiss lawmakers are set to meet Tuesday to debate a proposal that could soften the impact of stricter capital rules on UBS, the country's largest bank. At issue is whether UBS should be allowed to use a type of debt known as Additional Tier 1 (AT1) to satisfy part of new requirements aimed at making the bank safer after the collapse of Credit Suisse in 2023.
The rules, drafted by the Swiss government in response to the Credit Suisse crisis, are designed to ensure that UBS—now significantly larger after taking over its rival—can absorb losses without needing a taxpayer bailout. One key proposal would require UBS to hold roughly $20 billion more in Common Equity Tier 1 (CET1) capital, the highest-quality form of capital that consists mainly of ordinary shares and retained profits. That would be a substantial increase on top of the bank's already large capital buffer.
What is AT1 debt and why does it matter?
AT1 bonds are a hybrid form of capital that banks issue to meet regulatory requirements. They sit somewhere between equity and traditional debt: they pay interest like bonds, but they can be written down or converted into shares if a bank's capital falls below a certain level. This feature is why regulators count them as capital, but they are riskier for investors than regular bonds because losses can be imposed on them.
In the Credit Suisse rescue, AT1 bonds were written down to zero, wiping out around $17 billion of bondholders' investments. That event made AT1 a controversial and closely watched instrument. If Swiss lawmakers allow UBS to use AT1 to meet part of its foreign-unit capital requirement, it would reduce the need to raise new equity or retain more profits, easing the immediate financial pressure on the bank.
However, regulators may be wary. The whole point of the stricter rules is to ensure UBS has enough loss-absorbing capacity. Relying too heavily on AT1 could be seen as weakening that safety net, especially given the controversy over how AT1 holders were treated in the Credit Suisse collapse.
Why is this happening now?
The push for tougher capital rules follows the emergency takeover of Credit Suisse by UBS in 2023, which was orchestrated by Swiss authorities to prevent a global banking crisis. The merger created a banking giant with a balance sheet that is roughly twice the size of Switzerland's entire economy. That concentration of risk has worried regulators and politicians, who want to ensure that if UBS ever runs into trouble, it can be resolved without government support.
The Swiss government has proposed a package of measures, including higher capital requirements for UBS's foreign subsidiaries. The idea is that if a foreign unit fails, it can be wound down without dragging down the whole group. But UBS has argued that the requirements are excessive and could hurt its competitiveness. The bank has said it would prefer to use AT1 debt to meet part of the requirement, which would be cheaper than raising new equity.
The parliamentary committee's discussion on Tuesday is a step in the legislative process. Any changes to the rules would need to be approved by the full parliament, and the final outcome is uncertain. UBS has also been lobbying against the most stringent aspects of the proposals.
What it means for investors
For UBS shareholders, the outcome of this debate is significant. If the bank is forced to hold an extra $20 billion in CET1 capital, it would likely need to retain more earnings or raise new equity, which could dilute existing shareholders. It could also limit the bank's ability to return cash to investors through dividends or share buybacks. Allowing AT1 debt to count toward the requirement would reduce that pressure, potentially supporting the share price.
For bondholders, the use of AT1 debt is a double-edged sword. On one hand, it could increase the amount of AT1 that UBS issues, providing more investment opportunities. On the other hand, it reinforces the risk that AT1 holders could face losses in a crisis, as seen with Credit Suisse. Investors in AT1 bonds need to understand that these instruments are designed to absorb losses, and they are not like regular corporate bonds.
The broader lesson for everyday investors is that bank capital rules are not just a technicality—they directly affect how much risk banks can take, how much profit they can return to shareholders, and how safe the financial system is. Stricter rules make banks more resilient but can also reduce returns. Weaker rules might boost short-term profits but increase the risk of future bailouts.
As the debate unfolds, investors will be watching closely to see whether UBS can negotiate a softer capital requirement. The decision could set a precedent for how other systemically important banks are regulated in the future. For now, UBS remains one of the best-capitalized banks in the world, but the outcome of this political process will shape its financial flexibility for years to come.
