Switzerland wants a secure UBS. The country would also like a major bank that remains internationally successful, maximizes benefits for the domestic economy, and creates lots of well-paying jobs. However, a financial centre that prioritises growth cannot simultaneously guarantee savers and investors the best possible protection.

Financial market supervisors and regulators are therefore forced to choose a course between stability and growth promotion, depending on political directives. Researchers at the Bank of England have modelled this dilemma using game theory under the conditions of intense international competition between financial centres. Their findings are of particular practical relevance for Switzerland in light of current developments.

In May, Finance Minister Karin Keller-Sutter's package of measures for „strengthening and further developing the too-big-to-fail framework“ is expected to enter the consultation phase. Before the 22 planned measures are implemented, a tightening of capital regulations for systemically important international banks is planned. It aims to strengthen their resilience and thereby reduce risks for taxpayers, the state, and the entire economy.

This mainly concerns UBS. The bank has wisely been restrained on this politically charged issue, but has nevertheless warned that any capital adjustments must be „targeted, proportionate, and internationally coordinated.“ Particular consideration should be given to competitiveness and the economic costs for Switzerland and its financial sector.

Of course, behind the scenes, the bank is lobbying intensely against additional capital requirements. The scenario of a Switzerland without UBS is also frequently raised – either because the bank itself chooses to leave, or because excessive capital requirements erode its stock market value to the point where it becomes a takeover target for other banks.

The bank's shareholders owners are also lobbying. Lars Förberg, partner at the Swedish investment firm Cevian, which announced a billion-dollar investment in UBS shares at the end of 2023, told the NZZ am Sonntag in February: „Switzerland is good for UBS, and UBS is good for Switzerland.“

Then came the implied threat. Nordea, the Swedish banking giant that moved its headquarters to Finland in 2018, and in which Cevian also has a stake, cost Sweden tax revenue. Many in Sweden regret the bank’s departure. Meanwhile, Finland is reportedly „very happy“ about the move. And that, despite the fact that Nordea, in relation to Finland's economic output, is even larger than UBS is for Switzerland.

Förberg thus promotes the idea of international competition among financial centres, all vying for the favour of large, mobile banks. But this competition has the potential to undermine financial stability – something that is not in the long-term interests of bank owners. Researchers at the Bank of England have shown in their model what could happen if financial regulators, alongside their stability mandate, are also tasked with promoting growth.

Caught in this dilemma, authorities may feel compelled to weaken stability objectives in favour of growth. The likelihood of this scenario increases when banks do not commit firmly to their existing location. For banks, competition between financial centres is a double-edged sword. Locations known for accommodating banks' wishes risk being perceived as unstable – harming shareholders, creditors, and, ultimately, customers. While banks in such locations may enjoy more regulatory freedoms, they may also feel compelled to compensate for a lack of trust in regulation with larger capital buffers.

The Bank of England researchers conclude that banks could do themselves and their shareholders a favour by recognising the overall quality of their location rather than bluffing with the threat of relocating. The reasoning is simple: a financial centre with above-average regulation does not have to be a nightmare for ambitious banks, just as a centre with loose rules is not necessarily paradise. The ideal lies somewhere in between.

It is no coincidence that the Bank of England is addressing this topic. Since 2023, promoting growth and competitiveness in London’s financial centre has been an explicit mandate of the Prudential Regulation Authority. Although this is a secondary objective, subordinate to financial stability, the hierarchy of regulatory priorities can quickly blur in a world where establishing global minimum stability standards is becoming increasingly difficult.

Switzerland’s Federal Act on Financial Market Supervision states in Article 4: „Financial market supervision aims, in accordance with financial market laws, to protect creditors, investors, and policyholders, as well as to ensure the proper functioning of financial markets. In doing so, it contributes to strengthening the reputation, competitiveness, and future viability of Switzerland as a financial center.“

While promoting growth is not an independent regulatory goal in Switzerland, the wording leaves room for political interpretation. Until about ten years ago, Swiss financial regulators faced constant political pressure for supposedly stifling financial sector growth. The collapse of Credit Suisse fundamentally changed that perception.

Internationally, the trend is clearly moving toward deregulation. This raises the pressing question of how Switzerland can achieve its stability goals while managing a giant like UBS in this evolving landscape. The Bank of England researchers note that the likelihood of competitive deregulation increases when multiple financial centres simultaneously pursue growth objectives – especially when a centre known for its stability places a stronger emphasis on growth.

The world's major financial hubs naturally take their cues from New York. Besides London, other key players such as Hong Kong and Singapore have also explicitly set growth goals. The gaps between financial centres have narrowed. It remains to be seen how it will affect competition. For Switzerland, the challenge remains a tricky one.