The Swiss Federal Council is expected to publish its proposals for adjusting capital requirements for systemically important banks next week. In the run-up, both UBS — the only remaining globally active Swiss bank that would be solely affected — and several industry associations are positioning themselves against the plans.

The BAK study concludes that higher capital requirements for UBS could make lending more expensive or more scarce, with consequences for investment, employment and growth. Economically, this would not constitute a temporary downturn, but rather a lasting reduction in Switzerland’s overall economic performance.

According to the economists’ simulations, these effects would build up over time. Depending on the transmission channel, cumulative GDP losses of between 11 billion and 34 billion francs over ten years are expected. This corresponds to 1,3 to 3,9 percent of one year’s total economic output (GDP = gross domestic product).

Structurally Higher Borrowing Costs

«Unlike a cyclical interest rate shock, the increase in borrowing costs driven by regulation is structural in nature and cannot be offset by monetary policy,» the study notes.

The analysis focuses solely on the full CET1 capital backing of foreign participations — the component that would exclusively affect UBS. «Potential macroeconomic consequences of the additional TBTF measures proposed by the Federal Council are not included here,» the authors add.

In one scenario, the estimated annual additional costs of 1,3 billion dollar resulting from higher capital requirements are assumed to be passed on to lending rates. This would translate into permanent interest rate increases of between +0,08 and +0,33 percentage points. A second scenario models a regulation-induced contraction in credit supply in the Swiss lending market.

Erosion of Switzerland’s Attractiveness as a Financial Centre

The third scenario, referred to by the authors as the «location scenario», incorporates the «sensitivity to a gradual erosion of the attractiveness of Switzerland as a wealth management hub». It assumes a convergence of Switzerland’s structural interest rate advantage — via the net interest margin (NIM) — towards EU levels (+0,84 and +0,42 percentage points, respectively).

Industry Groups Warn of ‘Fatal Own Goal’

The Zurich Banking Association has used the study to warn of a «fatal own goal». The region of Zurich would be particularly affected, accounting for 44 percent of the Swiss financial sector’s total value creation and 43 percent of its jobs.

The Swiss Bank Employees Association (SBPV) also cautioned that the Federal Council risks worsening the situation with «excessive regulatory requirements». The unemployment rate in the banking sector is already as high as it was after the 2010 financial crisis and continues to rise.

UBS Says It Must ‘Examine Options’

UBS reiterated its position at Wednesday’s annual general meeting. Chairman Colm Kelleher warned of the consequences of significantly stricter capital requirements.

«We want to keep our headquarters in Switzerland,» Kelleher stressed. «We have always sought a constructive solution and will continue to do so.»

However, UBS also has «a duty to carefully examine appropriate options to mitigate the negative consequences of these extreme proposals as far as possible, should they be implemented.» This includes engaging in corresponding lobbying efforts on behalf of its stakeholders.

«Against this backdrop, and given the growing pressure from the markets and from many of you, our shareholders, important business decisions may soon become unavoidable,» the chairman added.