Should capital requirements for banks—particularly for UBS—be further tightened to enhance financial stability and strengthen banks' resilience in times of crisis, as recommended by the Federal Council, Finma, and the Swiss National Bank in light of the recent Credit Suisse experience?

Or would tighter capital requirements harm Switzerland's economy by leading banks to reduce lending to companies? This approach could also undermine UBS's international competitiveness, potentially weakening the financial system over time, as long-term stability depends on financially healthy banks.

Discussion Paper on the Current State of Research

These questions loomed over the Swiss Finance Institute (SFI) event, which took place on Tuesday evening in Zurich in a packed hall. In the event's first segment, Steven Ongena, SFI Senior Chair and Professor of Banking at the University of Zurich, and Simona Nistor, Associate Professor of Banking at the Babeș-Bolyai University of Cluj-Napoca, presented their SFI Public Discussion Note on capital requirements for banks.

The two authors discuss why banks should hold equity, how much they should hold and whether they should increase it, as well as the alternatives. They draw on a large number of academic studies and analyses that take into account both theoretical models and practical experience and summarize the current state of research in their discussion paper.

Fewer Loans and Other Side Effects, But for How Long? 

However, anyone expecting clear answers from them was disappointed. There were indeed indications that banks had curbed their lending following an increase in capital requirements and that other side effects such as increased lending by the non-regulated sector also occurred. Nevertheless, the effect could only be temporary. The most important thing is to be aware that you have to work with many estimates and make trade-offs, Ongena noted.

Clearer divisions emerged on the podium—and especially among the audience—during the question-and-answer session. Three panelists with strong opinions on banking regulation took the stage, each contributing valuable insights on the topic.

UBS: «Our Shareholders Are the First Line for Defense»

For Yvan Lengwiler, Professor of Economics at the University of Basel, former Finma board member  (2012 - 2019) and Chairman of the Commission of Experts on Banking Stability — which released its report in September 2023 — argued that it is unrealistic for a single country to implement high capital ratios such as 30 percent, on its own. «There are trade-offs, which is why it is ultimately up to politicians to decide.» He also took up the cudgels for additional equity in the form of AT1, as an early warning indicator that also gives Finma leverage and criticized the SNB for not having prepared better for the extraordinary liquidity assistance.

Markus Ronner, Group Chief Compliance and Governance Officer of the UBS Group, stated that his bank must be internationally competitive in order to be profitable and therefore attractive to shareholders. «Shareholders are the first line of defense in a crisis.» Ronner responded to an audience question by explaining that if UBS were required to hold an additional 25 billion francs in equity capital—the maximum amount often mentioned if the Federal Council's proposals go through—it would incur costs for decades, reduce the bank's competitiveness, and make it less attractive to investors.

Daniel Zuberbühler's Déjà Vu

Roman Studer, CEO of the Swiss Bankers Association (SBVg) – which recently criticized the Federal Council's too-big-to-fail measures – emphasized that capital was not the problem in the CS case and that higher requirements could therefore not be the solution. Ronner added that the market had deemed Credit Suisse's business model unviable.

Daniel Zuberbühler, who worked at the Swiss Federal Banking Commission (SFBC) for over 30 years, was its director during the financial crisis and then a member of the Board of Directors of the successor authority Finma until 2011. He was among those who spoke from the audience and had to listen to the argument that higher capital requirements restricted lending and damaged the economy time and time again from bank representatives during the discussion on Basel III regulation. «But even today we are still a long way from the point at which it becomes really critical.»

How Realistic is the Liquidation of a Major Bank?

Zuberbühler also criticized the fact that CS had been granted too many exceptions, filters and relaxations with regard to the calibration of equity. Moreover, CS did indeed have a problem with its capital — a point that the forthcoming PUK report, expected later this year, may shed more light on.

There seems to be consensus that, in an emergency, even systemically important banks must be capable of being wound up in an orderly manner through resolution. Lengwiler argued that the focus should be on resolvability with a view to future crises, even though he was aware that the CS case, in which the Federal Council opted for a different solution, has undermined the credibility of the mechanism. After all, if a large international bank can’t be wound up in a relatively contained crisis, then when can it? The forthcoming PUK report is expected to provide further insights on this issue.