Swiss government and UBS strike a deal: CHF 9 billion to cover Credit Suisse’s asset liquidation losses, ensuring stability in the banking sector.
The Swiss government and UBS have reached an agreement under which the Swiss government will pay up to CHF 9 billion ($10 billion) in losses that the international lender may sustain as a result of the liquidation of rival Credit Suisse’s assets.
To avoid a banking and economic disaster in Switzerland, the government had earlier in March facilitated UBS’ urgent purchase of Credit Suisse for CHF 3 billion. When the troubled lender’s assets were sold, the federal government pledged that it would cover a portion of any losses.
Swiss Government and UBS Sign Agreement
The government and UBS reached an agreement on Friday to cover damages totaling more than CHF 5 billion and up to CHF 9 billion. The action is thought to be the last significant roadblock to UBS’ acquisition of Credit Suisse.
Only the loans, derivatives, legacy assets, and structured products portfolio from Credit Suisse’s non-core segment are covered by the guarantee. The portfolio, with a CHF 44 billion market value, represents only approximately 3% of the combined assets of the two banking behemoths.
The arrangement will become active after Credit Suisse is fully acquired by UBS, according to a statement from the Swiss government. The acquisition, which will make UBS twice as valuable as the Swiss economy, is anticipated to be completed by the end of next Monday.
The loss protection agreement is subject to a number of requirements, including that UBS maintain its headquarters in Switzerland and create an adequate organizational structure in the form of a separate organizational unit. UBS must also pay a number of costs, including a CHF 40 million initial setup fee, in order to use the guarantee fund.
The Swiss government highlighted that reducing potential losses and risks is a priority for both the federal government and UBS in order to prevent resort to the federal guarantee as much as feasible.
The deadline for the Swiss Federal Council’s consultation on a proposed public liquidity backstop for systemically important banks has just been moved up. With the Credit Suisse debacle in mind, the choice was made.
Following the recent banking crisis in the United States, Credit Suisse, a troubled Swiss banking powerhouse, collapsed in March after its shares fell to an all-time low. But in a hasty agreement, Swiss authorities offered the lender a rescue package, skipping the legislature and upsetting Swiss legislators.