UBS considers merger with foreign banks to escape Swiss regulation, shares surge

The Swiss parliament is advancing strict capital requirements, further intensifying the confrontation between UBS and domestic regulators.

On September 24, according to Semafor citing sources, UBS executives have resumed discussions on how to free the bank from Swiss regulatory control, with a merger being one of the options.

After the report was published, UBS shares in the U.S. market rose as much as 1.9%. Morgan Stanley shares initially fell quickly before narrowing losses, fueling speculation about potential merger partners.

The immediate trigger for these discussions was the Swiss parliament advancing legislation this week requiring UBS to raise up to approximately $20 billion in additional capital. UBS management stated that this requirement would severely undermine its ability to make profitable loans. CEO Sergio Ermotti expressed his displeasure in strong terms:

One black eye we can handle, but two black eyes and a broken nose are too much.

Parliamentary Vote: UBS Suffers a Major Setback

The outcome of the Swiss Council of States’ vote this week marks a clear defeat for UBS in its year-long struggle with domestic regulators.

The newly adopted 90% CET1 coverage requirement is far higher than the alternative proposal supported by UBS—which only demanded 50% CET1 coverage, with the rest allowed to be satisfied with Additional Tier 1 (AT1) capital.

The Swiss government had previously proposed an even stricter 100% CET1 requirement, but it was narrowly rejected by a 23-to-22 margin in the Senate, so the final 90% version is close to the government's stance and falls far short of UBS’s expectations.

A broader set of banking law amendments was passed in the Council of States by 33 votes to 10, but the legislative process is not yet complete. The bill must still go to the Swiss National Council for review, which has the power to modify or soften the provisions from the upper house.

With the legislative process moving to the National Council, UBS still has a chance to push for a more moderate final framework. UBS is expected to continue lobbying for the 50%/50% CET1 and AT1 mixed model, while the Swiss government insists on its hardline 100% CET1 position.

Capital Pressure: The Competitive Cost Behind the Numbers

The heart of this regulatory dispute lies in the scale of potential capital pressure on UBS.

UBS has estimated that a 90% CET1 requirement would necessitate an additional ~$16 billion in top-quality capital. Including around $2 billion from other regulatory measures this year, as well as roughly $15 billion already required under existing rules following the acquisition of Credit Suisse, the total incremental CET1 requirement at the UBS parent level could reach as much as $33 billion compared to before the Credit Suisse acquisition.

UBS also estimates that the annual comprehensive cost resulting from these capital changes after the acquisition could reach about $2.5 billion.

For investors, capital forced to remain at the parent company means less is available for share buybacks, dividends, and business expansion. As a result, long-term shareholder returns face downside risk. If the bank fails to offset this with higher profit margins, cost-cutting, or shifting to less capital-intensive businesses, raising capital requirements will directly reduce return on equity.

UBS emphasizes that, compared to its U.S. peers, this regulatory environment puts it at a clear disadvantage. The Trump administration is pursuing deregulation, with U.S. banks progressively being freed from capital constraints.

Regulatory Logic: Lessons from the Credit Suisse Crisis

The push by Swiss regulators for tougher capital requirements is rooted in systemic vulnerabilities exposed by the collapse of Credit Suisse in 2023.

Regulators concluded that when a global bank encounters a crisis, capital held at foreign subsidiaries often cannot be promptly deployed by the Swiss parent. Requiring higher-quality equity capital at the parent level to cover a greater proportion of subsidiary value aims to provide a thicker buffer against potential losses, and thus reduces the risk of taxpayers having to once again rescue troubled institutions.

CET1 is favored by regulators because it mainly consists of common equity and retained earnings, which can immediately absorb losses. While AT1 bonds also have loss-absorbing capacity, their status was highly controversial during the Credit Suisse rescue.

At the time, about 16 billion Swiss francs of AT1 debt was written off completely, even as shareholders received partial compensation, triggering strong skepticism in the market.

UBS, on the other hand, insists that well-designed AT1 remains an effective loss-absorbing instrument, and that excessive reliance on the more costly CET1 will weaken its international competitiveness.

Merger Rumors: Multiple Paths Out of Switzerland

Facing rising regulatory pressure, according to Semafor, UBS executives have resumed discussions about moving the bank’s domicile out of Switzerland, with a merger being among the most closely watched possibilities.

However, given UBS’s $1.7 trillion balance sheet and $146 billion market capitalization, there are very few potential merger partners that can match its scale.

Semafor notes that Morgan Stanley has long been discussed as a possible candidate, having previously expressed interest in UBS’s $7 trillion in wealth management account assets.

In addition, Standard Chartered and Deutsche Bank are seen as relatively cheap alternative pathways. It’s notable that UBS Chairman Colm Kelleher previously worked at Morgan Stanley.

Currently, UBS remains highly profitable and well capitalized, but this escalating regulatory standoff increasingly brings into focus one core question: Just how much of UBS’s future profits will Swiss authorities allow shareholders to retain?