TheChek News Flow

Bank’s year-long tussle with government will come to a head with proposals to be unveiled on Friday

The Swiss government on Friday will lay out its long-awaited reforms to the country’s bank capital rules, and the centrepiece proposal will affect just one company: UBS.

Switzerland’s Federal Council and financial regulators have been at loggerheads with the country’s largest lender — and most systemically important company — since last year when they proposed strengthening the country’s banking system in the wake of Credit Suisse’s demise.

The uncertainty has weighed on UBS’s share price, with the stock falling 3 per cent over the past year, while the Euro Stoxx Banks index, which tracks the biggest lenders in the Eurozone, has climbed about 40 per cent.

The draft legislation on Friday will set out a series of measures as part of a “too-big-to-fail” package. By far the most important will be the proposals for how much loss-absorbing capital UBS will be forced to have.

The bank’s executives believe they are being punished for the mismanagement of Credit Suisse — including by regulators — in the years before its collapse and subsequent rescue by UBS. 

In 2017, Finma granted Credit Suisse capital relief which in effect allowed the bank to inflate the value of its foreign subsidiaries. Last year, Swiss lawmakers criticised Finma for the move, calling it “incomprehensible”.

Despite an extensive public and private lobbying campaign by UBS’s leadership, senior figures at the bank are resigned to the government proposing what they see as the most “extreme” option: forcing it to fully capitalise its foreign subsidiaries, a move it says would increase its total capital requirements by 50 per cent from current levels.

But the way in which the government imposes the additional capital requirements on UBS — as well as details surrounding the implementation timeline — will be crucial to the severity of their impact on the bank.

At the centre of the stand-off between UBS and Switzerland’s political and regulatory establishment is a proposal that banks with foreign subsidiaries be subject to additional capital demands to deal with future crises.

Officials have argued that, given the size of the combined bank since the Credit Suisse acquisition — it now has a balance sheet larger than Switzerland’s economy — UBS needs more capital as a buffer against potential losses at its international units.

At present, UBS is required to match 60 per cent of the capital at its international subsidiaries — such as the US and UK — with capital at the parent bank. Forcing the lender to match the entire capital at these units would increase its requirements by about $25bn, according to the company and analysts.

“The Federal Council views a less than 100 per cent backing as problematic during a crisis when the value of foreign subsidiaries deteriorates fast, as a hypothetical fire sale of a foreign subsidiary could materially dent the capitalisation of the parent company,” said Giulia Aurora Miotto, an analyst at Morgan Stanley.

The Federal Council could require UBS to boost capital either by requiring it to fully deduct its foreign subsidiaries from equity, or by increasing their risk-weighting.

Regulators determine how much capital is required to support risk-weighted assets, or RWAs.

Under the current regime, UBS’s foreign subsidiaries will by 2028 have their capital risk-weighted at 400 per cent. The Federal Council could increase that to about 600 per cent if it wanted UBS’s parent company to fully match the foreign subsidiaries’ capital.

Aurora Miotto said the risk-weighted approach “would lead to a lower impact” for UBS, while the capital deduction approach — regarded as the more likely outcome — would be “more penalising”.

Analysts at RBC, including Anke Reingen, co-head of global financials research, said their “base case” was that UBS would be required to make a “full [capital] deduction”, adding: “Every $1bn in additional capital needed is a 1 per cent hit to the market cap [of UBS].”

If UBS were forced to fully capitalise its foreign subsidiaries, it would push the bank’s core equity tier 1 ratio — a key measure of capital strength — to between 17 per cent and 19 per cent, according to the bank’s calculations, significantly above the level required of its international peers.

Other global systemically important banks such as HSBC, Deutsche Bank and Morgan Stanley have minimum CET1 requirements of 11.1 per cent, 11.3 per cent and 13.5 per cent respectively.

Analysts at Goldman Sachs said the proposed increase to UBS’s CET1 ratio would “significantly impair [its] competitiveness versus large international peers”.

This is a point that UBS’s senior management, including chief executive Sergio Ermotti and chair Colm Kelleher, have been at pains to stress in recent months.

“We are not magicians,” Ermotti said in April. “We are not going to be able to be competitive and provide and be an engine of growth for the financial centre, but also for the economy, if the regulatory framework is not competitive.”

Separate to the anticipated reforms, UBS is already adding about $20bn to its capital because of Switzerland’s early implementation of global rules, and its increased size following the Credit Suisse takeover.

As a result, there has been speculation UBS may need to offload some of its international businesses.

“Depending on the amount of additional capital required, some businesses may become uneconomical for UBS, and this could lead to strategic decisions for the bank, like the potential to sell the US business,” said Morgan Stanley’s Aurora Miotto.

Such a move would be a blow to Ermotti and Kelleher’s ambition of turning UBS into a European version of Morgan Stanley, which also has a large wealth management operation but trades at a much higher multiple than its Swiss peer. UBS has identified US growth, especially in wealth management, as a key strategic priority.

The Federal Council will announce on Friday whether the capital reforms will be implemented via government ordinance — in effect an executive order — or if the legislation will be put to parliament for consultation.

While the latter option would give UBS the ability to lobby politicians to water down the new regime as the bill is amended, it would also prolong the uncertainty facing the bank. Industry observers have estimated that the proposed law might not come into force until 2028 or even 2029.

There is also the question of how long UBS will be given to implement the new capital regime once it is finalised. Morgan Stanley analysts said: “Anything below 10 years would be a negative, while a longer timeline would be taken positively by the market.”

RBC estimated that, based on its analysts’ forecasts for the bank’s free cash flow from 2030, every additional phase-in year would provide UBS with $4bn of capital.

Jérôme Legras, a managing partner at Axiom Alternative Investments said one way UBS could mitigate the impact of higher capital requirements would be to bring excess capital back from its subsidiaries to the parent bank.

For example, he said, if one international subsidiary had $13bn of capital, but the local supervisor only required $10bn, UBS could repatriate $3bn. Such a move would require approval from the local supervisor, but Legras said that UBS was likely to ask for the minimum amount needed in each subsidiary.

The government is also expected to publish on Friday proposals to boost capital quality, changing the treatment of assets that are not sufficiently recoverable in a crisis, such as in-house software costs and deferred tax assets (DTAs). RBC estimates that these adjustments could take up to 2 percentage points off UBS’s CET1 ratio.

Friday’s announcement is a “significant risk event” for UBS’s share price, according to analysts at Morgan Stanley. They put the potential size of the stock move on the day at 5 per cent — up or down.

After more than a year of uncertainty, UBS will get some clarity on the scale of the regulatory challenge it faces — even if the centrepiece proposal is likely to be an unwelcome one for the bank.

US president escalates trade war by doubling levies on all exporters except the UK

US tariffs of 50 per cent on steel and aluminium have come into force on Wednesday, a day after President Donald Trump signed an executive order escalating his global trade war.

The new tariffs took effect at midnight on Wednesday, doubling the 25 per cent levies on the sectors that the president had introduced in March.

Duties on UK steel and aluminium will remain at 25 per cent — a carve-out for London after it signed a trade deal with Washington last month.

Trump said on Tuesday that the tariffs were necessary to prevent dumping by foreign producers that would “threaten to impair the national security”.

“The increased tariffs will more effectively counter foreign countries that continue to offload low-priced, excess steel and aluminium in the US market and thereby undercut the competitiveness of the United States steel and aluminium industries,” Trump wrote in the order late on Tuesday.

The additional duties intensify the US president’s bid to reshape international commerce even as much of his trade agenda remains in legal limbo. A court ruled last week that he lacked the authority cited when he imposed his most sweeping “liberation day” tariffs on April 2.

The ruling — which has since been paused by an appeals court — did not affect sector-specific levies, such as those on steel and aluminium, which Trump introduced using a different authority.

Trump indicated he could yet hit London with the higher rate if his commerce secretary Howard Lutnick “determines that the United Kingdom has not complied with relevant aspects” of the agreement after a July 9 deadline.

The president announced his plan to double the tariffs during a rally at a Pennsylvania steel mill last week, promising to erect a “fence” around the domestic metals industry that would in effect lock out foreign producers.

“That means that nobody’s going to be able to steal your industry,” he told a jubilant crowd of steel workers on Friday.

“At 25 per cent, they can sort of get over that fence. At 50 per cent they can no longer get over the fence.”

The policy drew swift condemnation from Canada, the largest supplier of steel and aluminium to the US, where the industry warned in recent days of “mass disruption” and “catastrophic” job losses.

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A film that will portray the chaotic time at OpenAI, when co-founder and CEO Sam Altman was fired and rehired within a span of just five days, is reportedly in the works.

According to The Hollywood Reporter, the movie is titled “Artificial,” and it’s in development at Amazon MGM Studios.

While details aren’t finalized, sources told THR that Luca Guadagnino, known for “Call Me by Your Name” and “Challengers,” is in talks to direct. The studio is considering Andrew Garfield to portray Altman, Monica Barbaro (“A Complete Unknown) as former CTO Mira Murati, and Yura Borisov (“Anora”) for the part of Ilya Sutskever, a co-founder who urged for Altman’s removal.

Additionally, “Saturday Night Live” writer Simon Rich reportedly wrote the screenplay, suggesting the film will likely incorporate comedic aspects. An OpenAI comedy movie feels fitting since the realm of AI has its own ridiculousness, and the events that took place two years ago were nothing short of absurd.

In November 2023, Sam Altman was dismissed from the AI company and resigned from both his position as CEO and his role on the board. The rationale was that the board no longer trusted Altman to lead effectively. However, just five days later, after numerous discussions and negotiations, an agreement was reached, resulting in Altman’s reinstatement.

No matter who is cast in this movie, it’ll be fascinating to see how “Artificial” portrays the drama and what the overall reception will be among general audiences, especially considering the increasing prevalence of AI tools like ChatGPT.

The American homeland is also vulnerable to drone and missile attacks

By now Americans know about Ukraine’s remarkable drone strike on Sunday that damaged as many as 40 aircraft deep inside Russia as strategic bombers sat like ducks in a row on military bases. One urgent lesson beyond that conflict is that the U.S. homeland is far more vulnerable than most Americans realize.

The details about Ukraine’s daring operation are few, but Kyiv managed to sneak cheap drones across the border and use them to destroy costly Russian military assets. The bang for Ukraine’s buck was considerable. You don’t have to be a fan of thrillers to imagine a similar scenario in the United States.

“Could those have been B-2s at the hands of Iranian drones flying out of containers, let alone Chinese?” military analyst Fred Kagan asked this week. The U.S. strategic bomber fleet is small (about one-third the size it was in the Cold War) and concentrated at a handful of bases. See the aerial photo flying across social media of B-52 bombers lined up at Barksdale Air Force Base in Louisiana. The story is similar for fighters and capital assets like aircraft carriers.

One lesson is that President Trump’s planned Golden Dome missile-defense shield isn’t the boondoggle it’s portrayed to be in the press. The headlines are preoccupied with space-based interceptors. But the U.S. is exposed to many threats besides ballistic missiles—from drones and spy blimps to cruise missiles launched off submarines.

The bipartisan Strategic Posture Commission warned in 2023 that the U.S. needs better integrated air and missile defenses against “coercive attacks” from Russia and China, and such an attack could come from conventional weapons. In a crisis over the Taiwan Strait, Xi Jinping might threaten the Commander in Chief: Stay out of the Western Pacific or you never know what might happen to your pricey F-22s in Alaska.

That’s one reason the U.S. needs a layered missile shield that exploits new technology and existing systems like the Patriot. Israel’s recent success shooting down drones with lasers shows that innovative and affluent societies can meet new threats. President Trump deserves credit for elevating missile defense as a presidential priority.

But the U.S. has lost some basic muscle memory since the Cold War on living in a dangerous world. A prescient report this year from Thomas Shugart and Timothy Walton at the Hudson Institute warned about highly vulnerable U.S. airfields, especially in the Western Pacific.

For the new B-21 bomber, the Air Force is looking at shelters “akin to sunshades,” Messrs. Shugart and Walton write, that could leave the aircraft “exposed to threats, including lethal” unmanned aerial vehicles. “Not building approximately $30 million” hardened aircraft shelters “for over-$600 million B-21 bombers is an unwise decision that could endanger the US’s ability to strike globally,” they write.

Such shelters always end up being a low budget priority compared with airplanes and missiles, and the message here is that defense spending can’t stay at 3% of the economy and provide the security Americans expect. The bill moving through Congress puts up $25 billion for Golden Dome. But a national air defense won’t be built by a one-time cash infusion, and the Administration is ducking a sustained defense buildup to mollify its fiscal hawks.

Americans are accustomed to wars fought far from home by a force of volunteers, but everyone in the U.S. will be on the front lines of the next conflict. Political leaders could be doing much more to educate the country about this vulnerability, rather than boasting that the U.S. military is the best it has ever been. It isn’t.

Ukraine did the U.S. a favor by destroying bombers of a U.S. adversary—and sending America a wake up call about its own complacency.