From rescuing Credit Suisse to considering a cross-border merger: UBS (UBS.US) has fallen into a “capital siege,” will the next stop be teaming up with Wall Street?

The Zhitong Finance App learned that the capital dispute between Swiss-based international financial giant UBS (UBS) and Swiss regulators is extending from shareholder return disputes to strategic choices in cross-border mergers, corporate structures, and even headquarters ownership. As many large commercial banks on Wall Street have expressed interest in a potential merger or other combination to UBS, UBS European stock trading prices and US stock ADR (UBS.US) trading prices both rose sharply last Friday.

Swiss media quoted a person familiar with the matter on Friday as saying that at least eight banks have expressed interest in potential transactions with UBS. Earlier, financial media Semafor revealed that senior UBS officials are rediscussing plans to reduce the impact of Swiss regulations, including integration with foreign financial institutions. As more stringent capital requirements were supported by the upper house of the Swiss Parliament, contacts with external banks added strategic options to UBS, but at present, public information is still at the stage of discussions on intentions and plans, and cannot yet be regarded as formal merger negotiations or confirmed transaction arrangements.

The core of the dispute between the Swiss government and UBS is how much shareholder capital is required for UBS to conduct overseas business. On September 23, the Senate supported the requirement that UBS use common share tier 1 capital (CET1) to cover 90% of the book value of the shares invested in foreign subsidiaries held by its Swiss parent bank; this does not require the capital adequacy ratio of foreign subsidiaries to reach 90%. According to UBS estimates, the plan will increase the parent bank's CET1 requirements by about 16 billion US dollars, plus about 2 billion US dollars brought in by other regulations this year, for a total of about 18 billion US dollars. This refers to additional capital requirements, not $18 billion in losses, fines, or financing that must be completed immediately. The relevant bill must also go through subsequent parliamentary procedures such as the lower house.

UBS's own operating performance also shows that this game mainly revolves around capital efficiency and future returns. UBS Group's net profit for the second quarter was US$2.8 billion, and the Group's CET1 capital adequacy ratio was 14.4%, and announced that it will continue to implement a US$3 billion share repurchase plan to be completed by the end of the second quarter of 2027. However, UBS made it clear that the scale and progress of the repurchase will still depend on operating performance, capital levels, and the progress of the parliament's review of capital requirements for overseas subsidiaries.

The main focus that investors need to reevaluate is how much of the increase in operating profit can be converted into distributable capital, and how much of this capital can ultimately support repurchases, dividends, and business expansion. The catalyst that really has investment significance is the final capital rules, enforceable restructuring plans, and their actual impact on repurchases and return on capital.

The dispute over capital rules extends to cross-border mergers

According to Swiss media, as Switzerland's largest commercial bank UBS Group faces pressure from stricter capital requirements, several large international banks, including Wall Street giants, have already contacted UBS about potential mergers or other forms of mergers. Some Swiss media reported that at least eight banks have expressed interest in potential transactions with UBS (UBS), citing information revealed by people familiar with the matter.

Just a few days before these banks expressed interest, the upper house of the Swiss parliament supported stricter capital rules for UBS (UBS). UBS estimates that the proposed requirements could force it to hold an additional capital of around $18 billion.

The news added a new strategic dimension to the dispute between UBS and Swiss regulators. Mergers with foreign banks, corporate restructuring, or relocation may mitigate the impact of Switzerland's stricter rules. But any major deal poses significant regulatory, political, and enforcement risks. The immediate question facing shareholders is whether UBS can find a way to limit additional capital burdens without compromising returns or disrupting its wealth management business.

UBS Chairman Colm Kelleher previously warned before the parliamentary vote that if the new capital requirements are too stringent, the bank may reconsider whether to continue to have its headquarters in Switzerland.

On Friday, Semafor reported that UBS (UBS) executives have rediscussed ways to reduce the bank's exposure to Swiss regulations, further heating up merger speculations. According to its sources, integration with foreign financial institutions is one of the possible options being considered.

The controversy stemmed in part from Switzerland's response to the collapse of Credit Suisse in 2023. At the time, UBS bought Credit Suisse in a government-supported bailout operation. Since then, Swiss policymakers have sought to strengthen safeguards to prevent the risks posed by a bank with a balance sheet compared to the country's large economy.

Swiss Finance Minister Karin Keller-Zotel refuted speculations that UBS might leave Switzerland. She said over the weekend that the cost of moving the bank's headquarters is likely to be higher than the cost of complying with the proposed capital requirements, and it will face significant legal complications.

The news that foreign banks have expressed interest does not mean that UBS has entered into formal merger negotiations or decided to proceed with the transaction. However, the news raised the possibility that disputes over capital rules could eventually reshape UBS's corporate structure or change its relationship with Switzerland.

UBS faces a “capital siege”: Why are regulatory differences likely to drive mergers and acquisitions?

Judging from the bank's capital structure, depreciation of overseas subsidiaries will affect the value of equity investment held by the parent bank; if the parent bank previously partially relied on debt to finance these investments, losses may erode the parent bank's own capital buffer.

The Swiss government hopes that by increasing the share capital support ratio, banks will have more leeway to sell overseas operations and repair their balance sheets during the crisis, so as to reduce the possibility of relying again on state bailouts. Regulators prioritize whether crisis losses can be absorbed by banks themselves, while UBS management pays more attention to capital returns during normal operating periods and international competitiveness. The root cause of the dispute between the two sides is how to allocate costs between financial stability and the efficiency of capital use.

From the perspective of investment analysis, this situation can be summed up as a “capital siege”: the business can still generate profits, but the increase in shareholder capital required to support the same business may reduce the return on capital and the space for capital allocation. Capital is not a sum of cash that must be left idle in an account, nor will it be included in income statement expenses in equal amounts due to increased requirements; its main impact is the financing structure and opportunity cost of shareholders' capital. When profits and other conditions remain the same, a larger equity capital base will reduce the return on equity, and capital accumulation requirements may also restrict repurchases. This creates a major merger and acquisition logic worth paying attention to — the same wealth management customer, fee revenue, and global business network may correspond to different capital use efficiency and valuations under different regulatory frameworks. However, capital enhancement may also reduce risk and financing costs, and the final value change needs to be measured comprehensively.

Whether cross-border mergers can result in revaluation depends on long-term capital cost savings, improved business collaboration and distributable profits, and whether they are sufficient to cover transaction premiums, consolidation expenses, risk of customer churn, and new regulatory requirements. Simply changing the headquarters address does not automatically relieve the responsibility of supervising operations in Switzerland, nor does it mean that overseas regulators will unconditionally accept a larger banking group. Swiss Finance Minister Karin Keller-Zotel believes that the relocation may be more expensive than complying with the new capital requirements and involves complex legal issues.