UBS and the Swiss government have reached an agreement to address potential losses stemming from the emergency takeover of Credit Suisse, the largest bank in Switzerland. The deal, signed on Friday, provides coverage of up to 9 billion Swiss francs ($10.00 billion) for UBS. The Swiss government stated that UBS must maintain its headquarters in Switzerland as a condition of the agreement. UBS announced that the loss protection agreement (LPA) will become effective upon the completion of the Credit Suisse takeover, which is expected to occur as early as June 12.
Under the terms of the agreement, UBS will receive guarantees if it incurs losses from the sale of Credit Suisse assets exceeding 5 billion francs. UBS is responsible for covering the initial 5 billion francs itself. However, the state funding does come with certain costs for UBS, including setup and maintenance fees, as well as premiums on any money drawn.
The government made the funds available to facilitate the emergency takeover of Credit Suisse, which posed a risk of triggering a global financial crisis. In a statement, the government explained that it granted UBS a guarantee for any losses incurred in the liquidation of Credit Suisse assets to make the takeover possible. The guarantee will only come into effect if the losses from the liquidation exceed 5 billion Swiss francs and is limited to a total of 9 billion francs.
The agreement covers a portfolio of Credit Suisse assets that were challenging to evaluate within the short timeframe during which the banks negotiated the deal. These assets are not essential for UBS’s future core business. The government stated that the guarantee applies to assets valued at approximately 44 billion Swiss francs, equivalent to around 3% of the combined assets of the merged group. These assets primarily consist of derivatives, loans, legacy assets, and structured products.
The valuation of the losses is expected to be determined in the third quarter of 2023. The government emphasized that the scale of the losses is highly dependent on the actual wind-down of the assets and market developments, making it difficult to estimate the probability of drawing on the guarantee and the amount involved.
Both UBS and the government share the priority of minimizing potential losses and risks to avoid utilizing the backstop to the greatest extent possible. UBS has committed to managing the assets in a prudent and diligent manner, aiming to minimize losses and maximize their value realization.
The agreement does not include federal participation in losses beyond the agreed-upon total of 14 billion francs. Such a commitment would require a legal basis and parliamentary approval for a corresponding guarantee credit.
The agreement will remain in effect until the final realization of the Credit Suisse assets. Both UBS and the authorities are keen to reassure the Swiss public that the emergency takeover, which was facilitated with the use of emergency laws and supported by public funds, will not burden taxpayers.
Concerns have been raised about the combined bank’s size, which is roughly twice the size of the Swiss economy. This has prompted the country’s Social Democrats to propose reducing UBS’s assets. Some have also called for UBS to maintain Credit Suisse’s Swiss operation as a separate entity to ensure competition and preserve the heritage of the 167-year-old lender.
The loss protection agreement represents one of the final obstacles that UBS needs to overcome before officially finalizing the largest banking deal since the global financial crisis. Talks regarding the scope and details of the loss protection agreement have been ongoing for several weeks, even though the emergency takeover was negotiated over a single weekend.