UBS Left Reeling as Swiss Finance Chief Wins Over Lawmakers Bastian Benrath-Wright It’s just gone half-time in Switzerland’s long contest between UBS Group AG and the government over capital, and the finance minister is in the lead. On Wednesday the upper house of parliament, or Council of States, backed a plan that broadly hews to what Karin Keller-Sutter has fought for over the past two years: forcing the nation’s largest bank to substantially increase the amount of equity capital it holds at home. The interim result was engineered with a mix of forceful parliamentary rhetoric, tactical moves and a delay that gave her an extra week to regroup after UBS looked to be gaining the upper hand.

The next round moves to the lower house of parliament where the plan could yet be watered down, and a decision is unlikely before next year. Yet the Council of States’ surprising backing of her position may presage similar support in the more left-leaning lower house. Despite being a member of the pro-business FDP, Keller-Sutter’s main backers on the UBS file come from left-of-center parties.

The stakes are high. UBS says the capital reform would translate into an extra requirement of some $16 billion in CET1 capital and render it uncompetitive against global peers. The firm heavily criticized the decision by the upper house and pledged to continue its fight against the planned measure.

UBS shares were down 2% in early Thursday trading, and have trailed peers this year. The dispute centers on how much capital UBS should hold against its foreign subsidiaries — a complex matter which many lawmakers struggled to master. On Wednesday, Keller-Sutter, 62, addressed lawmakers just before the vote in the Council of States’ towering, neo-renaissance chamber in Bern.

The trained interpreter broke down the technical debate into a vote for or against safeguarding the public finances. “The question at hand is basically quite simple,” she said. “Who has to bear the risks that a major bank takes abroad? Is it the owners of the bank, the shareholders? Or also the taxpayers in Switzerland?” During her roughly 45-minute speech, Keller-Sutter displayed a grasp of technical details — including the observation that UBS’s CET1 ratio would still be lower than its peer Morgan Stanley under the new rules. Speaking in a measured tone, she took on the key counterarguments against her proposals one by one, and tackled the argument that higher capital demands would have a knock on effect on financing costs for the Swiss economy along the way. Until recently, UBS appeared to be in the ascendant.

A key parliamentary committee on Aug. 31 backed a solution that would be substantially cheaper for the bank than the finance minister’s proposal, involving heavy use of convertible AT1 bonds. The bank had put some effort into nudging lawmakers into that direction, always arguing that the government plan would disadvantage the Swiss financial center. After initially criticizing even that plan, UBS and supportive lobby groups threw their weight behind it in recent days, with Chief Executive Officer Sergio Ermotti calling the proposal the “way to go.” But Keller-Sutter gained an unexpected opening when the debate in the upper house last week ran beyond its allotted time after far more lawmakers than anticipated wanted to speak.

The vote had to be postponed, handing the finance minister several extra days to reassess the chamber. The debate had shown that a meaningful group of lawmakers was uncomfortable with both extremes on the table: backing 100% of the foreign units with the best-quality equity capital, or the version that allowed half of the new requirement to be met with AT1 debt. Those lawmakers’ preferred landing point was 90% CET1 backing, according to what they said in the debate last week.

So, Keller-Sutter adapted her tactics. The night before the vote, she pointedly played down the distance between the compromise and the government’s line.