Europe vs Switzerland: Striking the Balance Between Banking Regulation and Competitiveness

The recent developments in both European Union banking reform and Swiss regulatory reform represent a convergence around one key issue: the tension between financial stability and competitiveness. In the EU, the European Central Bank, supported by financial institutions and political leaders, is advocating strongly for facilitating cross-border bank mergers. Key obstacles identified include national barriers—such as divergent insolvency regimes, varying deposit insurance schemes, and restrictions on capital and liquidity fungibility across borders. The ECB insists that many of the impediments are political rather than prudential, and that the partially constructed Banking Union—particularly its missing deposit insurance pillar—is a major structural deficit.

In Switzerland, the government has proposed sweeping reforms in response to the Credit Suisse collapse. Among the changes are stricter capital rules for systemically important banks (notably UBS), including raising minimum common equity Tier 1 (CET1) requirements, full capitalization of foreign subsidiaries, and curbing capital distributions such as buybacks.

UBS itself has pushed back hard. Chair Colm Kelleher described the proposals as “extreme”, and CEO Sergio Ermotti warned that the designs represent an overreaction that may hurt Switzerland’s standing as a financial center. Internal modelling suggests that under the toughest version of the rules, UBS’s CET1 ratio could rise from ~14% to ~20%—far above many global peers. These reforms could impose $24–26 billion of additional capital demand, with a net increase of ~$18 billion after adjusting for reductions in AT1 bond holdings.

The stakes are high. Strong regulatory reforms can increase financial safety, reduce taxpayer exposure, and improve systemic resilience. But they also risk imposing significant costs: higher capital requirements raise funding costs, reduce shareholder returns, and could drive global banks to relocate to more permissive jurisdictions. Indeed, UBS is preparing scenarios including relocating its HQ to London or the United States, not just as fantasy, but as serious contingency planning. Such a move would have economic, legal, and political consequences for Switzerland’s tax revenues, jobs, and its perception as a stable financial hub.

Strategically, Europe and Switzerland are facing a shared challenge: how to harmonize financial regulation enough to allow economies of scale, competitiveness, and cross-border operations, without sacrificing the safety and domestically driven protections that arose from crises. Key open questions include: what timeline for implementing reforms ensures both credibility and manageability; whether governments will accept ceding a portion of control for supranational consistency; how global competitors will react; and what the tipping points are for banks to act on relocation threats rather than merely using them as leverage.