UBS and Switzerland can both emerge as champions

Just over two years ago, on 18 March 2023, I was watching my team Collina d’Oro play Zug 94 at our home pitch in Gentilino, near Lugano. The match was between two top-ranked teams, both of which still hoped to win the Swiss second interregional league championship. Suddenly my phone started buzzing. At the end of the first half, I checked my messages and heard that Swiss authorities were reaching out. They were preparing for different scenarios to stabilize Credit Suisse and asking whether I would be willing to help.

Hours later, after the match ended in a draw, I agreed in principle to become chairman of a to-be restructured Credit Suisse should an acquisition by UBS not transpire. Having spent my career in banking, starting at 15 as an apprentice, I felt a responsibility to the industry. I also thought this was a critical moment for Switzerland to pull together and show the world its pragmatic, capable face by avoiding unnecessary costs and reputational damage to the country and beyond. Finally, I had a strong belief that the reforms following the 2008 financial crisis, which I had implemented in my previous tenure as UBS chief executive, ensured that the recovery planning of big banks was robust and that Credit Suisse could be resolved in a structured manner.

Two years since that fateful weekend, as we tackle the last major integration milestone and migrate our clients in Switzerland to one platform, I wanted to share some reflections with you on where I believe we are headed. I also want to give you my unfiltered perspective on the public debate in Switzerland on future banking regulations. There is a lot of noise out there, often ill-informed, and I imagine many of you get questions from clients, friends and family on the topic. You are the faces of UBS in Switzerland and I’m convinced you are the best ambassadors for our firm. Together we can contribute to making sure that both Switzerland and UBS emerge as winners from the unfortunate demise of Credit Suisse.

No longer a question of “Too Big To Fail”

Credit Suisse was clearly not too big to fail – because, well, it did. If UBS hadn’t stepped up, in addition to shareholders and AT1 owners taking the hit, subordinated bondholders with CHF 48 billion at stake would have borne any further losses, shielding the taxpayer. The new bank would have emerged from the weekend with around four times the capital needed to meet Switzerland’s already-demanding rules, according to estimates by the Financial Stability Board.

And I’m even more certain today than I was two years ago that Credit Suisse could have been wound down to a much smaller, well-capitalized Swiss bank with some international wealth management activities.

That Credit Suisse could have been resolved is a conclusion that many true banking experts and regulatory bodies like the Bank for International Settlements have reached when examining the facts that have emerged these past two years.

It's also why it feels a bit out-of-date to label the discussion we’re having in Switzerland a “Too Big To Fail” debate. This label doesn’t reflect the facts and the substantial progress made since the financial crisis, nor the USD 1.5 billion UBS invested between 2014 and 2019 to adapt its legal entity structure to strengthen resolution planning.

UBS was part of the solution

In March 2023, the authorities just chose a different – and I believe better – option. While I was relieved not to be asked to wind down Credit Suisse, I was satisfied to see that we in Switzerland were able to resolve a self-inflicted issue on our own, and that thanks to its successful business model and strong capital position, UBS was part of the solution. 

A few days later, I was humbled to be asked to return to my previous job at UBS to manage the integration and position the combined bank for a bright future. I knew that the restructuring task wouldn’t be easy, and would require hard work and patience from all of us at UBS and the support of our shareholders, who would forego more than USD 15 billion of earnings before seeing any benefits. That, in addition to the USD 3.2 billion we paid for Credit Suisse, comprises the true cost of the acquisition, something that in some cases is willfully or conveniently overlooked when analyzing the transaction. But it was the right thing to do, not only for UBS and our industry, but, importantly, for Switzerland. Looking back, it’s fair to say I never expected the greatest obstacle to delivering a successful outcome would come from the same authorities who asked us to take on the Credit Suisse challenge.

Clearly the demise of Switzerland’s second-largest bank warrants a rigorous debate. This is why UBS, and I personally, going back to the fall of 2023, contributed our own analyses and suggestions for regulatory reforms based on the actual lessons learned from Credit Suisse’s troubles. But we must also recognize that excessive regulatory tightening would have far-reaching consequences, going well beyond the bottom line of any one bank.

The recommendations that the federal government, with input from authorities including FINMA and the Swiss National Bank, will publish in coming weeks will potentially impact Swiss households, the competitiveness of our enterprises and national prosperity. And not just today – the decisions made now will affect future generations of Swiss families, entrepreneurs and industry professionals. Therefore, facts – not emotions, ideology or attempts to downplay institutional accountability – should guide the outcome.

Before rewriting laws, look at why existing ones weren’t enforced

Fortunately, the public now also has extensive fact-finding to help form its views. The Expert Group on Bank Stability mandated by the Swiss government produced an analysis which, to my mind, deserves more attention in the public and political debate. And we have the work of the Parliamentary Investigation Commission (PUK) into the origins of the crisis. Both make clear the bank’s collapse was not a consequence of a defective regulatory regime. Their combined 600-plus pages describe an institution that pursued a flawed business model and strategy for too long. Among their key findings: substantial regulatory concessions enabled Credit Suisse to muddle through and avoid the market’s discipline.

These facts prove that Switzerland’s capital requirements are robust enough, but only when applied effectively, which was not the case for Credit Suisse. That’s why it makes no sense to discuss new rules without understanding why the existing ones weren’t enforced.

What we can derive from the PUK report and other analyses is that, had these concessions been given with an appropriate time limit and stricter conditions, and had the bank and authorities consistently disclosed them publicly, Credit Suisse would have been forced to adjust its business model early on and we’d probably still have two large Swiss banks today.

These facts prove that Switzerland’s capital requirements are robust enough, but only when applied effectively, which was not the case for Credit Suisse. That’s why it makes no sense to discuss new rules without understanding why the existing ones weren’t enforced. Let’s use an analogy and be honest with ourselves: we don’t talk about changing the laws every time a crime is committed. We ask: how did this happen? Where were the police? It should be no different with banking.

While UBS challenged some elements of the regulatory framework after the 2008 crisis, we implemented them all, without concessions. Many of you highlight every day to clients the role capital strength plays as a key pillar of our strategy. The ultimate proof of the robustness of the Swiss capital framework, when coherently applied, was our ability to step in and resolve the first case of a collapsed global systemically important bank within just a few months.

UBS and Swiss GDP – and other assertions that grab headlines but miss facts

While the parliamentary and expert group reports have shed light on what went wrong, there are still voices perpetuating myths that muddy the debate over regulatory reform. Some of these, like the notion that UBS benefits from an implicit state guarantee, don’t reflect the facts. In that case, the market rates UBS pays above the Swiss sovereign prove the assertion to be weak. UBS pays 250 basis points a year, or around USD 3 billion, in net additional funding costs above the rate of Swiss government bonds as a substitute for a state guarantee.

Equally, it’s imperative that we avoid selective information or bespoke metrics that advance specific agendas or fail to take Switzerland’s unique economic circumstances into account. The most common of these is the simplistic comparison of UBS’s balance sheet with Switzerland’s gross domestic product (GDP).

In isolation, I can understand how such a metric might raise questions. But so too would statistics like the size of the balance sheet of the Swiss National Bank relative to the Swiss economy. And as many of you may know, Switzerland leads the world in private debt per capita. Do either of these portend a threat to economic stability? Of course not. They reflect Swiss peculiarities. Taken out of context this sort of information can be weaponized or used to stoke unwarranted fears.

The Swiss economy is around the 20th largest in the world, according to the International Monetary Fund. Is it really so strange, then, that UBS is the 20th-largest bank in the world?

The truth of the matter is that Switzerland punches well above its weight on many economic measures. That’s remarkable, but we shouldn’t take it for granted. We are wealthier than our neighbors, with GDP per capita double that in Germany or France. The capitalization of our stock market is greater than that of Italy, Spain and Austria combined. Again, none of these measures provide cause for concern. No single metric can tell the whole story – more sophisticated analysis is required. The same is true when discussing the size of UBS relative to Swiss GDP.

By the way, the Swiss economy is around the 20th largest in the world, according to the International Monetary Fund. Is it really so strange, then, that UBS is the 20th-largest bank in the world? Switzerland overachieves – why shouldn’t we both play in the Champions League?  

Support for targeted, proportionate and internationally aligned reform

Even though I believe the current regulations governing banks are effective, when events like those of March 2023 occur, we need to evolve. That’s why we support the Federal Council’s proposals as long as they’re targeted, proportionate and internationally aligned. Most importantly, we must remove the flexibility of different parties – including banks and their supervisors – to unilaterally interpret regulations.

As mentioned, since at least the fall of 2023 I have applauded regulatory adjustments that further strengthen the resilience of the Swiss financial center.

Firstly, we need to better clarify responsibilities and strengthen the accountability of senior managers, as well as boards of directors. Here, we support actions that not only address canceling but also clawing back compensation and facilitating the possibility of legal action against individuals who demonstrate negligence in their duties. This would align Switzerland with other key jurisdictions.

Secondly, we need to be able to detect potential weaknesses earlier. Public stress tests like those used in the US and other jurisdictions can better pinpoint the strengths and weaknesses of financial institutions.

For example, more coherent communication from the Swiss National Bank in its annual financial stability report in the years prior to Credit Suisse’s collapse, pointing out that Credit Suisse’s parent bank only fulfilled capital requirements thanks to sweeping concessions, would most likely have resulted in the bank being forced to adjust its capital position or business model. By strengthening market discipline, we would also reduce the risk and impact of repeat errors on the part of supervisory authorities.

This matters because it’s not just the quantity of the published capital ratio but its implementation and the quality of the framework that matters. For example, we are supportive of adjustments to the way the value of subsidiaries is accounted for and have also expressed support for enhancing some elements of loss-absorbing capacity.

But let’s also recognize that existing Swiss capital requirements are already among the most stringent globally. UBS’s ability to stabilize Credit Suisse and restore financial stability in days confirms this. Our own subsequent analysis also showed that consistent application of the existing capital rules, together with a prudent valuation of foreign subsidiaries, would have been sufficient to cover Credit Suisse’s substantial losses.

Moreover, Switzerland has implemented the latest round of Basel III rules, earlier and to a greater extent than the EU, UK and the US, where the shift is toward loosening, not tightening, rules. As it stands, we hold around 10% more equity for the same risks compared to our international competitors, which already puts us at a disadvantage.

Restoring credibility – without hindering prosperity

Fundamentally, a key lesson from the Credit Suisse collapse is the need to help the public feel comfortable that a bank can be resolved without damaging the economy and taxpayers. UBS’s recovery and resolution plans have been reviewed and confirmed by FINMA. But it’s clear that we, and the Swiss authorities, need to continue our efforts to better inform people that a resolution would work in practice and would not cost the taxpayer.

That’s why I have been particularly outspoken since returning as CEO, engaging with stakeholders at all levels at every opportunity. Not just with many of you, friends and family, but also with our clients, politicians and the media. As a firm, we’ve proactively offered our lessons learned to the Finance Department and other authorities to identify risk at early stages, with potential recovery measures prepared in advance alongside credible options for resolution.

To that end, we are implementing further measures to increase our resiliency, supported by a USD 185 billion cushion – our total loss-absorbing capacity (TLAC). That’s almost four times the losses UBS incurred in the years following the 2008 crisis, when investment banking accounted for almost three-quarters of our balance sheet – compared to 29% today for the combined bank, as well as a limit of no more than 25% of our total risk weighted assets deployed to the Investment Bank. Moreover, we now have a completely different business model, with some 60% of our revenues derived from asset-gathering activities and 20% from our Swiss bank, in addition to a diversified balance sheet that is unique among the world’s systemically important banks.

In the unlikely case of a resolution, an extension of the central bank’s role as the lender of last resort is critical. This is why we welcome the introduction in Switzerland of a public liquidity backstop (PLB), which would align the country with international best practices and increase the resilience of our banking system. A PLB would facilitate an orderly wind-down – only after shareholders, AT1 and TLAC bondholders, as well as managers’ deferred compensation has been wiped out. That’s the reason this can’t be seen as a guarantee for the bank or an invitation to moral hazard.

Lastly, we support strengthening FINMA. While it has far-reaching powers already, these should be more defined, particularly in regards to the role it plays in enforcing regulatory requirements and the senior manager regime. FINMA does possess a considerable range of instruments for intervention. For example, it limited the bonus pool of certain areas of UBS on a few occasions in the past 15 years, ordered the closure of various banks, prohibited a medium-size private bank from taking on certain foreign clients and curtailed the business activities of a foreign bank. It also has the authority to limit variable compensation, dividends and share buybacks if a bank does not meet its capital requirements in a sustainable way. As we know from the PUK report, in the case of Credit Suisse FINMA approved compensation and shareholder payout proposals and accommodated a weak capital situation with unsustainable regulatory concessions.

A strong business model is the surest source of stability

Since 2012, UBS has pursued a business model focused on asset gathering that is fully aligned with the Federal Council’s strategic vision for the Swiss financial center. That’s why shareholders award UBS a premium valuation. We have no intention of diverging from this winning strategy – and in any event, shareholders would be the first to notice and penalize us. This should also help comfort those who may worry about potential decisions taken by future managers of our bank, including the next generation of talented recruits who aim to have a long and fulfilling career at UBS.

One of the pillars of our strategy is capital strength and a balance sheet for all seasons. This will continue to be important in our strategy and for us to continue to support Swiss households and companies with loans that currently amount to CHF 350 billion.  

Increasing capital requirements will make those services more expensive and, over time, interfere with our ability to compete internationally. This would also have implications for us as the third-largest private sector employer in Switzerland, the taxes paid by our firm and its employees (CHF 2.5 billion in 2023), our ability to educate young talent (currently ~2,300 trainee positions) and our community engagement. Claims that having more capital is always better are simplistic. And to our knowledge, no serious cost-benefit analysis has been conducted on the impact of higher capital rules – despite the pronouncements by many wishing to increase them. For any such study to be credible, it would need extensive data and other inputs from our firm, which we’d be happy to provide.

Equally worrying: if our returns on capital are not competitive compared to our global peers we’ll be less attractive to shareholders. This could have some unintended consequences. For example, if our returns are weak, it will dissolve the motivation of shareholders to be our first line of defense should that ever be necessary in a severe macroeconomic crisis, globally or in Switzerland. This is another key lesson from the Credit Suisse crisis. When investors stopped believing in the bank’s survival, there was no turning back.

The end of Credit Suisse has also clearly demonstrated that there is nothing worse than a bank that has not generated sustainable profits for years, engages in activities fraught with risk and whose reputation has also been tarnished.

Securing a future that benefits all

The upcoming debate must be vigorous. We need to embrace courage over fear as we look to the future, as I wrote last year in Die Neue Zürcher Zeitung. After what happened at Credit Suisse – and UBS during the financial crisis – I understand that many see the danger of a large bank in our country. Too often opinions based on selective facts overlook the many advantages of a vibrant financial center with an internationally competitive bank at its heart. Our clients tell me that they benefit significantly from having a bank in Switzerland that provides state-of-the-art global connectivity and leading-edge products and services. They say it’s imperative for the ecosystem of business, innovation and entrepreneurship to have a bank like UBS that they can turn to.

This is a moment for Switzerland to shine and not compromise its image as a haven for stability where practical and sensible policymaking usually wins out over extremes.

But I also believe this is a moment for Switzerland to shine and not compromise its image as a haven for stability where practical and sensible policymaking usually wins out over extremes. Against this backdrop, I’m motivated to continue advocating for the Swiss financial industry, also to benefit future generations. I envision UBS at the center of a vibrant, diversified financial center that also helps us meet the needs of the many innovative start-ups that emerge from our leading research institutions, a trend that will only gain in strength as AI and other technologies take hold. With its Swiss roots and a global network, UBS would be well positioned to further strengthen its role as a pillar of a financial center that generates jobs, tax revenues and innovations for decades to come.

Ultimately, the decision on future regulatory requirements for UBS rests with the Swiss parliament, and it’s our duty and right to respectfully engage with all parties throughout the process, highlighting the tradeoff between risks and opportunities. I hope we can demonstrate once again our uniquely Swiss approach to solving problems as we tackle financial regulation.

Either way, we won’t let this distract us from our mission. Our priority is to fully integrate Credit Suisse, including migrating all clients to one platform. We’ll do this while meeting the challenges that disruptive innovations like AI bring to our doorstep, ensuring that UBS – and the Swiss financial center – remains ahead of the global pack.

I am enormously appreciative of the way that all of you have remained focused throughout the integration so far, and know that you will continue to do so during the next delicate and important phase of this journey.

Thanks to your engagement and steady support, dear colleagues, I remain firmly committed to the promises our Chairman Colm Kelleher and I made at the close of the acquisition of Credit Suisse on 12 June 2023: “We will stay focused on what really matters: the safety and security of our clients’ assets and helping them achieve their goals. We will work together as we combine our strengths and capabilities. We will make decisions based on facts and with the bigger picture top of mind. We will never compromise on UBS’s strong culture, conservative risk approach or quality service.” I am sure you all share this commitment, too.

It’s been two years since I received that call on the sidelines of the football pitch. On that day, Collina d’Oro and Zug 94 tied 1-1. Neither of us went on to win the championship. In Switzerland, we often think a draw, or compromise, is an acceptable outcome. But that’s not always true. Another team entirely walked away with the trophy. For the good of the Swiss economy, financial center and UBS – as well as for future generations – let’s not allow that to happen here.