Why Do Banks Need Money They Aren't Supposed to Spend?
Imagine a bank has $100 billion.
That sounds like an enormous amount of money.
But there is a problem.
Most of it may not actually belong to the bank.
Some belongs to depositors.
Some may have been borrowed.
Only part of the financial cushion belongs to shareholders.
That distinction is at the center of a multibillion-dollar fight happening in Switzerland right now.
And it explains one of the most misunderstood ideas in banking:
capital.
Start With a $100 Bank
Forget UBS for a moment.
Imagine a tiny bank.
It has:
$100 of assets.
It financed those assets with:
$90 of deposits and debt
and:
$10 of shareholder capital.
Now suppose something goes wrong.
Some loans fail.
An investment loses value.
The bank loses $5.
Its assets fall from:
$100 → $95
But the $90 owed to depositors and creditors does not simply disappear.
Instead, the loss reduces the value left for shareholders.
Capital falls from:
$10 → $5.
The shareholders took the hit.
That is one of the central purposes of bank capital.
It creates a cushion between losses and everyone else.
Capital Is Not a Giant Pile of Cash
This is where the title becomes slightly misleading.
Bank capital is not literally money locked inside a vault that employees are forbidden to touch.
It is not a special room filled with cash.
Capital describes how a bank is financed and how much loss-absorbing equity stands behind its assets.
That distinction matters.
A bank can still lend.
Buy assets.
Finance companies.
Operate branches.
Run investment businesses.
The capital requirement determines how much loss-absorbing funding must support those activities.
So when regulators tell a bank:
You need more capital
they are not simply saying:
Keep more cash in the vault.
They are saying something closer to:
Put more shareholder money between your risks and everyone else.
Now Make the Bank Enormous
This simple idea becomes much more important when the bank is UBS.
UBS is not a small local bank.
It is a global financial institution with operations across multiple countries and trillions of dollars in client assets.
And after Credit Suisse collapsed in 2023, UBS acquired its former rival in an emergency takeover arranged with Swiss authorities.
Switzerland was left with an unusually important question.
What happens if its remaining global banking giant gets into serious trouble someday?
That question is now reshaping Swiss banking regulation.
Switzerland Wants a Bigger Cushion
The Swiss government has proposed tightening the rules governing how parent banks support their foreign subsidiaries.
The issue sounds technical.
The basic idea is not.
Imagine UBS owns a large banking subsidiary overseas.
That subsidiary has value.
UBS's Swiss parent owns that value as an investment.
But what happens if the foreign business suffers enormous losses and its value collapses?
The parent company can suffer too.
Switzerland's Federal Council argues that weaknesses in the treatment of these foreign participations became particularly important in the lessons drawn from the Credit Suisse crisis.
Its original proposal would require systemically important banks to fully back their foreign participations with the highest-quality form of regulatory capital:
Common Equity Tier 1, or CET1.
In simple terms, Switzerland wants a thicker layer of shareholder-funded protection beneath those foreign businesses.
What Is CET1?
The name sounds complicated.
The basic idea is simple.
CET1 is the strongest core layer of a bank's regulatory capital.
It consists mainly of common equity and retained earnings, after regulatory adjustments.
Think back to our $100 bank.
If something goes wrong, regulators want enough genuinely loss-absorbing capital standing underneath the bank's assets.
CET1 is the part regulators trust most for that job.
Think of it as the bank's strongest financial shock absorber.
UBS Already Has Capital
This is important.
The argument is not that UBS has no capital.
UBS reported a:
14.4% CET1 capital ratio
at the end of 2025.
It again reported a:
14.4% CET1 capital ratio
for the second quarter of 2026.
The dispute is more specific.
It concerns how much capital should back UBS's foreign subsidiaries at the Swiss parent-bank level.
Under the existing framework, foreign participations have been subject to partial backing.
The Swiss government proposed moving toward:
100% CET1 backing.
UBS argued that was too much.
And then Parliament entered the fight.
Switzerland's Upper House Chose 90%
On September 23, 2026, Switzerland's Council of States voted:
29–16
for a different proposal.
Not 100%.
Not the softer compromise UBS had supported.
90% CET1 backing.
Under UBS's own estimate, that version would require approximately:
$16 billion of additional CET1 capital.
That is a significant difference.
Another proposal would have allowed part of the requirement to be met using Additional Tier 1 capital, or AT1.
UBS had supported that approach as a more manageable compromise.
The upper house rejected it.
But the rules are not final.
The legislation now moves through the rest of Switzerland's parliamentary process.
The lower house still has to take its position, and the two chambers may have to reconcile differences before any final law emerges.
Why Does Switzerland Want So Much?
Because bank failures have a peculiar problem.
The losses do not necessarily stay inside the bank.
A sufficiently large failure can threaten:
depositors,
credit markets,
other financial institutions,
businesses,
the broader economy,
and eventually governments.
Credit Suisse demonstrated how quickly trouble at one bank can become a national problem.
Swiss Finance Minister Karin Keller-Sutter has framed the proposed reforms around a straightforward principle.
If large losses occur, shareholders should be positioned to absorb them before taxpayers are put at risk.
That is the government's side of the argument.
Then Why Is UBS Fighting It?
Because capital has an economic cost.
Imagine two banks each earn $10.
Bank A needs $50 of shareholder equity to support its business.
Bank B needs $100.
In a deliberately simplified example:
Bank A:
$10 profit / $50 equity = 20% return on equity
Bank B:
$10 profit / $100 equity = 10% return on equity
Same profit.
Different return on shareholder capital.
Real bank accounting and regulatory capital are much more complicated than this example.
But the tension is real.
Requiring more equity can make a bank more resilient while also making the same level of profit produce a lower return on shareholder capital.
That helps explain why UBS cares so much about the proposal.
Safety Has a Price
UBS CEO Sergio Ermotti has argued that extremely strict capital requirements could weaken UBS's ability to compete with international rivals.
UBS Chairman Colm Kelleher has also warned that very harsh rules could force the bank to reconsider aspects of its future in Switzerland.
Swiss business groups have argued that higher capital costs could eventually affect financing costs and credit availability.
Those are arguments from UBS and its supporters.
They are not uncontested facts.
The Swiss government and the Swiss National Bank put more weight on the other side of the equation:
what happens when a giant bank gets into trouble.
The disagreement is not really about whether banks should be safe.
Almost everyone agrees they should be.
The argument is about:
how much safety should be required, and who should pay for it.
The Argument Is Really About Who Loses First
Strip away the acronyms.
Forget CET1.
Forget AT1.
Forget regulatory ratios for a moment.
Something goes wrong.
The bank loses billions.
Now ask:
Who loses first?
Shareholders?
Bondholders?
Depositors?
The government?
Taxpayers?
Bank regulation is partly about deciding how many financial layers a loss must travel through before it reaches people outside the bank.
Switzerland wants those first layers to be thicker.
UBS agrees that banks need strong protection.
It disagrees about how thick that protection needs to be.
There Is No Free Version
Suppose a country required very little bank capital.
Banks could operate with more financial leverage.
Shareholder returns could be higher when things go well.
But the financial system would have less protection when things go badly.
Now move in the opposite direction.
Require much more equity.
The bank may become more resilient.
But the economics of operating it change.
Shareholder returns may fall.
Some activities may become less attractive.
Some costs may ultimately be passed elsewhere.
Neither extreme is free.
That is why the real question is not:
Should banks be safe?
The harder question is:
How much financial protection should society require before the cost of that protection becomes too high?
There is no simple number that answers that question.
That is what Switzerland and UBS are fighting over.
Credit Suisse Changed the Calculation
Before 2023, this might have sounded like an abstract regulatory debate.
Then Credit Suisse collapsed.
Swiss authorities helped arrange its emergency takeover by UBS.
One of Switzerland's two global banking giants disappeared.
And UBS became even more important to the Swiss financial system.
That changed the calculation.
The Swiss government and central bank concluded that the country's framework needed stronger protection against another crisis.
UBS agrees that lessons should be learned from Credit Suisse.
But it disputes how far the response should go and argues that the proposed capital burden risks damaging its international competitiveness.
The same event produced agreement on the problem.
It did not produce agreement on the price of the solution.
So Why Do Banks Need Money They Aren't Supposed to Spend?
They don't.
Not exactly.
That is the useful misconception.
Bank capital is not a pile of money regulators force banks to leave untouched.
It is a financial layer designed to absorb losses before those losses spread elsewhere.
The thicker that layer becomes, the more protection there may be when something goes wrong.
But somebody has to provide it.
And that capital has an economic cost.
That is why an argument about obscure banking ratios has become a multibillion-dollar fight involving UBS, Switzerland's government, its central bank, shareholders, businesses and taxpayers.
Forget the acronyms.
Forget the vault.
The simplest question is the one that matters most:
When a bank loses money, who loses first?
BEYOND THE OBVIOUS.
Sources
Reuters — Swiss finance minister and UBS boss face off ahead of capital decision
UBS — Second-quarter 2026 results
UBS — 2025 Annual Report announcement
UBS — Statement on Swiss banking regulation
Swiss Federal Department of Finance — UBS takeover of Credit Suisse