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This narrative revolves around two presidents — vastly different figures with contrasting policies impacting their respective banks. One of them is Donald Trump. Following Trump’s victory in the US election on November 5 of last year, global banks experienced a surge in their share prices; the free-market advocate was expected to stimulate growth and curtail regulation, resulting in a boon for banking, particularly for the major Wall Street firms.
Shortly after taking office, Trump systematically weakened key regulators. Similar to his predecessors, he did so partially by changing their leadership in the typical party-political transition following elections. However, aside from the Federal Reserve, he has utilized his trademark iconoclasm: he has taken direct control over rulemaking and, in the case of the Consumer Financial Protection Bureau, he has effectively dismantled a vital regulator altogether.
This initiative has had ripple effects beyond American borders, encouraging deregulatory movements in the UK and EU due to concerns that these markets may struggle to remain competitive. As a result, many European bank shares have received a boost comparable to their American counterparts. Barclays and Deutsche Bank, much like JPMorgan and Goldman Sachs, have risen by 20-25 percent since the US election.
In stark contrast, the sentiment in Switzerland is quite different, notably home to another president with an essential regulatory agenda and a significant global bank, UBS. The developments of this agenda in the upcoming months will significantly influence the bank’s future.
In Switzerland’s unique governance structure, where senior ministers rotate the presidency yearly, finance minister Karin Keller-Sutter currently holds the position of Swiss president. Keller-Sutter and her colleagues at the Swiss National Bank and financial regulator Finma have a mindset that starkly contrasts with Trump’s deregulation as they prepare to enhance global standards to include a “Swiss finish.”
This push for reform is understandable. Just under two years have passed since Switzerland suffered the loss of one of its two global banks. The collapse of Credit Suisse, coupled with its state-managed rescue by UBS, left a significant blemish on the nation’s reputation for prudent governance. It was also a personal trial for Keller-Sutter, who was thrust into managing a high-profile systemic crisis just two months into her role as finance minister.
The outcome of this situation places UBS in a position facing the possibility of stricter regulations than its global competitors. While the bank’s share price initially rose following Trump’s election, it experienced a sharp decline in early February when the group cautioned about the anticipated effects of the proposed regulations.
Some of the proposed reforms are straightforward. Finma, historically subdued and submissive to its US and UK counterparts, must adopt a more assertive approach. A senior managers’ regime, similar to the one introduced in the UK after the 2008 crisis, should be established to ensure greater accountability for senior banking executives.
However, contention arises primarily around the issue of bank capital. The Swiss authorities want UBS, which is now significantly larger and presents a considerable too-big-to-fail risk to the nation, to enhance its core equity tier 1 ratio — a critical measure of capital strength. The objective is to elevate this ratio from its current level of about 14 percent of risk-weighted assets (in line with many global peers) to an estimated 17-19 percent, potentially costing up to $25 billion.
UBS has limited options to resist. It could signal the potential for relocating its domicile (a complicated process), merge with a European rival (most of whom are less profitable or incompatible), or risk acquisition by a Wall Street giant (unlikely given global regulators’ apprehension regarding large bank mergers and the strong probability that Swiss authorities would disallow losing the nation’s remaining top-tier bank).
An approach involving alternative concessions may prove more convincing. For instance, UBS might agree to a government ordinance imposing limits on risk, capping its investment banking activities at 25 percent of risk-weighted assets. Conversely, authorities could acknowledge some of their own shortcomings — bankers point out that Switzerland stands as the only major economy lacking a public liquidity backstop for periods of stress.
Prepare for months of negotiations leading up to a final set of reform proposals in May. Ultimately, despite the trauma Switzerland endured with the collapse of Credit Suisse, the spirit of compromise and consensus is ingrained in the nation’s identity. This may, if nothing else, provide UBS and its investors hope that the country will not stray too far from the global landscape.
