Swiss lawmakers face a quandary as they craft new capital rules for UBS (UBSG.S) following the 2023 collapse of Credit Suisse: too strict and Switzerland's biggest bank might move abroad, too lax and a potential referendum could prolong the uncertainty.

A lower house committee will on October 26 begin debating banking rules passed last month by the Swiss upper house of parliament that management at UBS suggested were intolerable. Prospects for lighter touch rules emerging appear slim.

Major investors have urged UBS to leave Switzerland in search of friendlier regulation, and the bank is drafting potential contingency plans including shifting its headquarters or merging with another lender, sources told Reuters.

Yet the cost of leaving or loss of its Swiss identity might be a price the Zurich-based wealth manager is unwilling to pay.

Leo Mueller, a Centre Party lawmaker on the committee, said parliament was in a tricky situation.

"If we water it down too much, there'll be a referendum. Then there's a risk people say 'it's not enough', it gets rejected and we end up with nothing at all," he said.

"If we're too strict, the bank could say, 'Well, Switzerland is now a tough place to do business, we'll look elsewhere.'" Compromises are circulating, with some lawmakers working to temper the proposals, but the view across the political spectrum is that any softening will be challenging.

The upper house decided UBS should back its foreign units with 90% Common Equity Tier 1 (CET1) capital, up from a current 60% buffer that can be partly met with cheaper capital. The government proposed a 100% CET1 requirement.

UBS has repeatedly said it wants to remain in Switzerland and that its presence there is beneficial to both the bank and the country. However, it argues the 90% CET1 proposal is excessive and would damage its competitiveness.

Finance Minister Karin Keller-Sutter, who has hinted at the possibility of a public referendum, in which a law can be challenged with enough support, wants parliament to sign off on the 90% CET1 target, a person familiar with the matter said. Her ministry declined to comment.

The Social Democrats, who favour 100% CET1 capital, say they will decide whether to seek a referendum once parliament has made its choice, which is not expected before December at the earliest.

Some shareholders say the proposed rules could suffocate UBS. Artisan Partners has publicly urged it to quit Switzerland over the regulations.

Hans-Peter Portmann of the centre-right Liberal Party, or FDP, has floated a 75% CET1 capital requirement for UBS' foreign units, combined with a mechanism to bolster its loss-absorbing capacity if capital ratios go below a certain level.

"A solution will be found that enables UBS to keep compensating shareholders for risk appropriately and to set aside investment capital for the future, while minimizing the default risk for the Swiss public as far as possible," he said.

Other proposals are likely to surface ahead of the full lower house debate expected in December. Upper house support for the 90% CET1 proposal was stronger than expected.

In the lower house, left-of-centre parties are better represented and those on the centre and centre-right are either split or leaning towards a firmer line, people within parliament told Reuters.

"My personal view is the lower house could settle on 90%," said FDP lawmaker Olivier Feller, who supports 100% CET1 backing of UBS' foreign units but said his party's stance was still under discussion. "We're a small country with a large bank."

Urs Saxer, a University of Zurich law professor, said any compromise would likely end up close to the 90% CET1 proposal.

"UBS will not act irrationally," he said. "One would need a very good reason to leave, and the stability and legal certainty Switzerland offer are not easy to find nowadays."