Opinion – UBS and Switzerland: capital hikes are not the right tool for the job
Prasad Gollakota
Swiss authorities and the country’s largest bank are in a standoff. Earlier this year, Switzerland’s banking supervisor, Finma, put forward a proposal to force UBS to hold tens of billions of Swiss francs more in capital. Swiss politicians and regulators say that, in the wake of the collapse of Credit Suisse, they have no choice but to harden the system, protect taxpayers and ensure that UBS and the broader Swiss economy can weather any potential economic or banking crisis. Some reports suggest that UBS will be required to hold up to SFr21bn (US$26bn) in extra capital.
UBS said those capital requirements will make it uncompetitive – and is threatening to relocate.
Finma insists that higher buffers are the only way to guarantee safety. But is that right? For policymakers, supervisors and market participants, the standoff raises a fundamental question – one that hangs over the whole banking regulatory system: will this move really deliver stability or simply shift risks elsewhere?
Finma’s strategy risks mistaking the symptom for the disease. Ever-higher capital is not the universal cure for banking fragility and history shows: banks don’t fail slowly from capital depletion; they fail suddenly from liquidity runs. No level of capital can stop a digital-age bank run.; once depositors doubt a bank’s stability, the speed of withdrawals dwarfs any balance sheet buffer.
There are several reasons to believe that unilateral capital hikes are simply not the right tool for the job.
Fighting on the wrong battlefield
The past two decades of crises have taught a blunt lesson: banks seldom die of slow capital erosion; they die of sudden liquidity collapse. Banks are intrinsically run-prone because they fund long-term, illiquid assets with short-term, run-able liabilities. That makes them inherently vulnerable, regardless of balance sheet strength. Modern crises illustrate the mechanics: funding evaporates first then solvency disappears. Credit Suisse and Silicon Valley Bank were undone by confidence collapses and deposit flight at digital speed; Lehman Brothers met a frozen wholesale market before capital depletion.
Market liquidity and funding liquidity spiral down together, overwhelming static capital ratios. If market liquidity dries up and assets can only be sold at fire-sale prices, banks need more funding. If funding liquidity tightens, banks are forced to sell assets. In practice, that usually means selling the most liquid, highest-quality assets first and at depressed prices, creating self-inflicted capital losses. Those sales depress prices further, worsening market liquidity. This feedback loop accelerates regardless of how much capital a bank last reported.
To be sure, stronger capital levels can bolster trust in the build-up to stress. They reassure depositors and counterparties that a bank can absorb losses. But once a run begins, that reassurance evaporates; withdrawals outpace cushions. Capital underpins credibility before a storm but liquidity decides survival in the storm.
Capital ratios are static snapshots. Liquidity spirals are dynamic processes that can wipe out confidence in days. Nobody waits to check whether the capital cushion is 13% or 20%. Ratcheting UBS’s capital by tens of billions may improve a solvency metric but does little to arrest a real-time run. In extremis, “more capital” is like thicker castle walls after the gate has been kicked in.
This underlines that timing is everything. Capital is there to absorb losses once they materialise, but confidence usually disappears earlier when governance falters, strategies drift or supervisors hesitate. By the time markets have walked away, no level of parent capital will bring them back. The supervisory challenge is not just how much capital to demand, but when to intervene with other tools so that capital never has to do all the work.
Outsourcing judgment is a category error
Reliance on prescriptive rules over active supervisory oversight is a journey in the wrong direction. Banking is dynamic and non-linear; checklists cannot keep up. Rules that capture a balance sheet today can miss how the risks evolve, and how they may unfold tomorrow. Andy Haldane’s “The dog and the frisbee” speech made this point memorably: in complex domains, simple, judgment-based supervision often outperforms baroque rules.
Some banking regulations – notably Basel’s Pillar 2 and the ECB’s SREP – exist for precisely this reason. They are a conscious effort not to impose formulaic ratios but to give supervisors discretion to adjust requirements on a case-by-case basis, including additional buffers where judgment deems them necessary. They keep supervisors in the loop in real time, evaluating business models, governance, asset quality and liquidity.
It is true that bank supervision faces ever-growing complexity but the answer is not ever higher capital ratios. The answer is ensuring supervisors have the expertise, resources and confidence to exercise judgment, based, of course, on adequate data and information disclosure. It is supervisors, not formulae, who must spot fragility early and act decisively.
Prescriptive capital hikes are politically easy but they sideline supervisors. Would you feel safer on a flight where pilots were barred from using their judgment in turbulence, forced instead to rely on an ever-thicker autopilot checklist?
No capital framework, however intricate, can be a substitute for supervision. Rules should support judgment, not replace it.
Obsession with the numerator over the denominator
The capital/liquidity regime targets the liabilities/equity side of the balance sheet. But blow-ups are typically born on the asset side. Whether it’s bad loans or investments, overexposure to a sector, poor underwriting, mispriced securities or hidden leverage, the trigger for a blow-up is almost always deterioration in assets. That’s where credit risk, market risk and concentration risk live. Capital regulation itself concedes that the problem begins on the asset side. Capital is calculated as a percentage of risk-weighted assets. If the risk assessment is wrong, the capital number is meaningless.
The liability side simply dictates how long you can survive the storm. The spark that erodes confidence comes from asset quality doubts. History proves the point: subprime mortgages and CDOs in 2008, Greek sovereign exposures in the eurozone crisis, Archegos and a host of other blow-ups at Credit Suisse, SVB’s duration-mismatched US Treasuries.
If you want fewer fires, don’t buy bigger extinguishers; store fewer accelerants.
Supervisors already have the tools: borrower-based limits, concentration caps, intrusive stress tests and loan-level data reviews. Evidence shows these strengthen resilience when used consistently. If Switzerland wants UBS to be truly safer, it should tighten asset-side discipline and make oversight more muscular, frequent and intrusive, not just add a thicker capital blanket.
Double-counting by design
The Swiss debate is not simply about making UBS thicker with capital across the board. It targets a particular weakness: the parent bank’s large, illiquid equity stakes in subsidiaries, especially those in the US and UK. These participations cannot be sold or funded quickly in a crisis and they fall under foreign supervisors’ control if stress hits. That makes them a special asset class and explains why Swiss authorities want more capital held against them. The logic deserves recognition, even if the blunt instrument of higher capital is not the only way to address it.
A worked example helps to see the dilemma. Suppose UBS has 100 of equity capital at the group level. Of that, 20 sits in the UK subsidiary and 20 in the US subsidiary, which may include buffers above local minimums. This leaves 60 at home in Switzerland. On a consolidated basis, Basel rules say the full 100 counts against the group’s assets, both Swiss and foreign.
In a crisis, however, foreign supervisors will almost certainly ringfence their own subsidiaries. That means the 20 in the UK and 20 in the US cannot be assumed to flow back to the Swiss parent. From Finma’s perspective, the parent might really have only 60 of “usable” capital once those participations are stripped out. That is why they propose full deduction of these participations from parent capital, ensuring the parent cannot count equity that is effectively locked away in subsidiaries. But deduction has a sharp consequence: it forces the group to capitalise those subsidiaries once for local supervisors, and then again at the parent; in effect double capitalisation. In other words, the rule closes one gap but manufactures another by treating the same buffers as if they must be held twice.
Critics of the approach argue that if the UK and US are supervising their subsidiaries properly, then each already has its own 20 to absorb local losses. The Swiss parent should only need to worry about the remaining minimums against the non-US and non-UK assets. Forcing UBS to hold fresh capital in Switzerland against subsidiaries that are already capitalised abroad looks like super-equivalence. Put another way: if the 60 is well supervised at home, and the 20+20 is well supervised abroad, then the original 100 should be enough. Additional parent-level demands risk looking less like prudence, and more like supervisors outsourcing supervision to the arithmetic of duplication.
Incidentally, the full deduction method unfairly forces the parent to fund both required and voluntary subsidiary capital, assuming that voluntary buffers are permanently trapped and equally loss-absorbing. Those assumptions are unrealistic, which is why the EU’s Single Resolution Board takes a more sensible approach – deducting only minimum requirements, not voluntary surpluses.
More to the point, would any of this have saved Credit Suisse? Unlikely. By the end, its problems went far beyond capital arithmetic: repeated scandals, weak governance and a broken business model had already eroded market trust and all things that stronger supervisory oversight could have addressed.
Confidence is not woolly psychology; it is by design
Everyone invokes “confidence”. Few define it. The single most important source of credibility in a banking crisis is the government, central bank or equivalent backstop. Everything else (asset quality, capital levels, governance, et cetera) only matters in the build-up to a crisis. When the run is on, markets will ask only one brutally simple question: will the state underwrite this institution or not? That hasn’t changed, despite the fact that the banking regulatory framework put in place in the years following the global financial crisis of 2008 was explicitly designed to take taxpayer-funded bank bailouts off the agenda in favour of a capital framework that put investors in the front line to absorb losses.
Any hesitation about state support, even a whiff of ambiguity, and the run accelerates.
High capital requirements risk sending exactly the wrong signal. They imply the sovereign is stepping back and that the bank must fend for itself because the government may not be there in the heat of a crisis. That creates a perverse loop: the more capital demanded, the more markets suspect the state is unwilling to stand behind the bank. And if the state is not there, the rational response is to run, sooner rather than later.
This is where moral hazard reenters the picture. The state cannot credibly withdraw the backstop. The Swiss government knows it and the market knows it. Pretending otherwise by imposing extreme capital rules does not eliminate the hazard; it simply relocates it from taxpayers to confidence itself.
Here lies Switzerland’s structural dilemma. UBS’s balance sheet dwarfs Swiss GDP. A small sovereign cannot plausibly commit to backstopping a global bank in all scenarios, and foreign supervisors will act on a “first-come, first-served” basis to ringfence their own entities. That mismatch fuels the impulse to overcapitalise.
Bringing it together
The Swiss impulse is understandable: after Credit Suisse, never again. But Switzerland had already imposed some of the highest capital requirements in the world when Credit Suisse failed, and it still did not prevent the collapse. Safety by statute is a mirage if it is to be a substitute for supervision by judgment. The smart equilibrium recognises that UBS and Switzerland are bound in a repeated game; that liquidity confidence is the true public good; that assets cause losses while capital only absorbs them; and that incentives, if left unattended, will route around static ratios.
So what are the lessons?
First, re-centre on liquidity realism. The immediate vulnerability in a crisis is not asset-quality deterioration but deposit flight. That means building stigma-free central bank facilities, sized credibly to the outflows a bank might face, with collateral pre-positioned and tested in public drills. Equally important is communication: joint playbooks between supervisors and the bank so that when stress hits, the message is fast, coordinated and leaves no room for panic. If markets are left to guess, they will assume the worst.
Second, ensure supervision is intrusive. Basel’s Pillar 2 was designed for this purpose, but too often has become a box-ticking add-on. What is needed is “Pillar 2 on steroids”: rolling deep-dives into business models, asset quality, governance and funding, with rapid escalation when weaknesses appear. Supervisors are actually well positioned to do this, given their broad view of all institutions and asset classes. Judgment, not ever-thicker rulebooks, is what works in complex systems.
Third, regulate the asset side, not just the liabilities/equity. Capital and liquidity rules fixate on how risks are covered and funded. But it is the loans, securities and investments that cause the damage. Stress tests should be adversarial rather than mechanical, combining shocks (policy shifts, funding squeezes, model failures) and carrying credible consequences when vulnerabilities are exposed. Fewer accelerants on the asset side mean fewer fires.
Capital is essential to credibility but it is not decisive in a run. It shapes perceptions of strength beforehand but, when withdrawals begin, what matters is access to liquidity and clarity of the state backstop. Runs are about immediacy; capital is about preparedness.
Higher capital can help, as one leg of a tripod. Make the other two legs taller and sturdier (liquidity backstops and intrusive asset-side supervision) and you will have learned the right lessons. Keep lengthening the first leg alone, and you’ll topple the stool.
Let’s change the question from “How much capital?” to “How do we stop a run by ensuring confidence?”
Prasad Gollakota worked at UBS from 2003 until 2012 and was co-head of the global capital solutions group during the global financial crisis. He is now chief content & operating officer at the xUnlocked.