Download too big to fail

UBSs response to evolving
regulatory requirements
addressing “too big to fail”
UBS supports international efforts to increase financial stability and avoid the risk
of banks that are systemically “too big to fail” (TBTF), requiring taxpayer
bailouts in a future crisis.
Background
In the aftermath of the 2007/09 financial crisis, UBS adopted too big to fail
(TBTF) requirements in Switzerland and other countries in which the Group
operates. UBS has responded with decisive action, improving its capital strength,
and investing heavily in and taken significant steps to improve the resolvability
of the Group by changing its legal structure, business model and risk profile.
Capital position
Since 2009 UBS has almost halved its risk-weighted assets (RWA) and significantly reduced its balance sheet. Today, UBS is among the best-capitalized large
global banks, with a fully applied Basel III CET1 capital ratio of 14.2% as of 30
June 2016, above our target of at least 13%. It operates a strong, successful cash
generating business. UBS values superior capital strength as it offers flexibility
to address expected and unexpected events, and offers a competitive advantage
that clients value.
New capital provisions in Switzerland
Switzerland has capital requirements for systemically relevant banks (SRBs) that
are among the most stringent in the world. These were strengthened further
in May 2016 when the Swiss Federal Council adopted a revised capital adequacy
ordinance, amending the already existing capital requirements and establishing
additional gone concern requirements. The revised rules became effective on
1 July 2016 and are fully applicable beginning 2020.
Going concern: Going concern requirements under the revised Swiss SRB
framework consist of a minimum requirement for all Swiss SRBs of a leverage ratio
of 4.5% and a capital ratio of 12.86%. In addition to the minimum requirement,
an add-on reflecting the degree of a bank's systemic importance is applied based
on market share and the leverage ratio denominator (LRD). The add-on for UBS
is expected to be 0.5% of our LRD and 1.44% of RWA. This results in total
going concern capital requirements of 5.0% of LRD and 14.3% of RWA, applicable from 1 January 2020. This excludes countercyclical buffer requirements
and any potential rebate. Any high- and low-trigger tier 2 capital remaining
after 2019 will qualify as gone concern capital (see below). Existing low-trigger
AT1 capital instruments will remain available to meet the going concern capital
requirements until their first call date.
1
Glossary:
Going concern capital
requirements refer to the capital
required to absorb losses from its
current operating activities
Gone concern requirements
refer to the additional loss-absorbing capacity required for restructuring or orderly wind down.
TLAC: The total loss-absorbing
capacity (TLAC) concept aims to
facilitate the resolution of globally
active banking groups without
impairing financial stability or
exposing taxpayers.
Gone concern: The provision includes an additional gone concern requirement
of 14.3% of RWA and of 5% of the bank's LRD to be met with bail-in instruments, which will continue to change the overall funding mix of the firm. In total,
UBS will be subject to a TLAC (total loss absorbing capacity) requirement
– defined as the sum of going and gone concern requirements – of up to 28.6%
of RWA and 10% of the Group's LRD.
Recovery and resolvability
UBS has developed comprehensive recovery and resolution planning globally and
locally that provides the tools to manage a severe loss event (i.e. a recovery). If the
firm cannot be stabilized, it also provides responsible authorities with resolution
plans for restructuring or winding down certain businesses.
Alongside these measures, the bank has invested significantly in structural,
financial and operational ring-fencing measures to improve the Group's
resolvability.
• In 2014, UBS established UBS Group AG as the Group holding company. This
step substantially enhances resolvability in response to evolving global regulatory requirements and facilitates the application of UBS's and key regulators'
preferred single-point-of-entry bail-in strategy.
• In Switzerland, UBS established UBS Switzerland AG in 2015 as a subsidiary of
UBS AG, for its Personal & Corporate Banking division and Swiss-based wealth
management business. With UBS Switzerland AG we implemented an ex-ante
separation of the systemically important functions and critical operations. The
vast majority of our clients in Switzerland have been transferred to UBS
Switzerland AG.
• In the UK, UBS implemented a revised business model for UBS Limited. Today
this legal entity carries a larger share of the risks and rewards deriving from
its own business.
• In the US, UBS established UBS Americas Holding LLC as a subsidiary of UBS AG
and designated it as our intermediate holding company for our US subsidiaries
in line with US rules for foreign banks under the Dodd-Frank Wall Street Reform
and Consumer Protection Act, or “Dodd-Frank”. Along with other measures
this will help us provide US regulators with viable resolution plans.
During the third quarter of 2015, UBS established UBS Asset Management
AG, a subsidiary of UBS AG, to which the firm plans to transfer the majority
of operating subsidiaries of Asset Management during 2016.
• In 2015, UBS also established UBS Business Solutions AG a fully owned subsidiary of UBS Group AG and the parent of its global service companies. We expect
that the transfer of shared service and support functions into the service
company structure will be implemented in a staged approach through 2018.
The purpose of the service company structure is to improve the resolvability
of the group by enabling us to maintain operational continuity of critical
services should a recovery or resolution event occur.
2
.GICNUVTWEVWTGQH7$5)TQWRCUQH&GEGODGT
7$5)TQWR#)EQPUQNKFCVGF
7$5)TQWR#)
7$5#)EQPUQNKFCVGF
7$5#)
7$5$WUKPGUU5QNWVKQPU#)
7$5
5YKV\GTNCPF
#)
7$5
#OGTKECU
*QNFKPI..%
7$5.KOKVGF
7$5#UUGV
/CPCIGOGPV
#)
1VJGT
UWDUKFKCTKGU
7$5
#OGTKECU
+PE
7$5$CPM
75#
7$5
(KPCPEKCN
5GTXKEGU
+PE
141.553 mm
7$5
5GEWTKVKGU
..%
&KTGEVCPFKPFKTGEVJQNFKPIU7$5#)CPFVJGUKIPKƂECPVUWDUKFKCTKGUUJQYPKPVJKUEJCTVJQNFKPCIITGICVGQHVJGUGQVJGTUWDUKFKCTKGUYKVJXGT[HGYGZEGRVKQPU
UBS: stronger, safer and simpler
• UBS's substantial progress has been positively recognized by equity and debt
investors, as well as credit rating agencies, whose credit ratings for UBS
assume neither implicit nor explicit state support for UBS Group AG in the
event of a recovery or resolution.
• The Swiss financial regulator FINMA has determined that the measures
completed by UBS warrant a rebate under its gone concern requirement.
• BS's strategy, business and the way UBS serves the vast majority of its clients
are not affected by these changes.
• These plans do not require UBS to raise additional common equity capital and
are not expected to materially affect the firm's capital generating capability.
• Finally, UBS continues to consider additional changes to the Group's legal
structure to improve the Group's resolvability further.
3