Switzerland Gives $10B Loss Guarantee to UBS for Credit Suisse Takeover

The Swiss government has
sealed a deal with UBS to cover up to CHF 9 billion ($10 billion) in losses
that might be incurred by the global lender due to its liquidation of rival
Credit Suisse’s assets.

The government had
brokered UBS’ emergency acquisition of
Credit Suisse for CHF 3 billion
earlier in March to prevent a Swiss banking and economic crisis. At the time,
the federal government assured it was ready to shoulder a portion of any losses
incurred from the sale of the troubled lender’s assets.

On Friday, the government
agreed with UBS that to cover losses more than CHF 5 billion and up to CHF 9 billion. The move is believed to be the last major hurdle facing UBS’ takeover of Credit Suisse.

The guarantee covers only
loans, derivatives, legacy assets and structured products portfolio from Credit
Suisse’s non-core unit. However, the portfolio, worth about CHF 44 billion, makes
up only about 3% of the two banking giants’ merged assets.

The Swiss government in a
statement noted that the deal will become active once the acquisition of Credit
Suisse by UBS is completed. The takeover is expected to be finalized next Monday, transforming UBS into a financial powerhouse worth twice
the Swiss economy.

However, the loss protection
agreement comes with several conditions, including UBS establishing an
appropriate organizational structure in the form of a separate organizational
unit and maintaining its headquarters in Switzerland. In addition, UBS, in
order to exercise the guarantee fund, is required to pay several fees, including an
initial set-up fee of CHF 40 million.

“The priority for the
federal government and UBS is to minimize potential losses and risks so that
recourse to the federal guarantee is avoided to the greatest extent possible,” the Swiss government noted.

Meanwhile, the Swiss
Federal Council recently moved
up the end date of its consultation for a planned public liquidity backstop
for systemically important banks. The decision was taken
in light of
the Credit Suisse fiasco.

Credit Suisse, an already-troubled Swiss banking giant, collapsed in March after its shares plunged to an all-time-low in the wake of the recent banking crisis in the United States.
However, Swiss authorities offered a rescue package to the lender in a rushed deal, bypassing the legislature and
angering Swiss lawmakers.

The Swiss government has
sealed a deal with UBS to cover up to CHF 9 billion ($10 billion) in losses
that might be incurred by the global lender due to its liquidation of rival
Credit Suisse’s assets.

The government had
brokered UBS’ emergency acquisition of
Credit Suisse for CHF 3 billion
earlier in March to prevent a Swiss banking and economic crisis. At the time,
the federal government assured it was ready to shoulder a portion of any losses
incurred from the sale of the troubled lender’s assets.

On Friday, the government
agreed with UBS that to cover losses more than CHF 5 billion and up to CHF 9 billion. The move is believed to be the last major hurdle facing UBS’ takeover of Credit Suisse.

The guarantee covers only
loans, derivatives, legacy assets and structured products portfolio from Credit
Suisse’s non-core unit. However, the portfolio, worth about CHF 44 billion, makes
up only about 3% of the two banking giants’ merged assets.

The Swiss government in a
statement noted that the deal will become active once the acquisition of Credit
Suisse by UBS is completed. The takeover is expected to be finalized next Monday, transforming UBS into a financial powerhouse worth twice
the Swiss economy.

However, the loss protection
agreement comes with several conditions, including UBS establishing an
appropriate organizational structure in the form of a separate organizational
unit and maintaining its headquarters in Switzerland. In addition, UBS, in
order to exercise the guarantee fund, is required to pay several fees, including an
initial set-up fee of CHF 40 million.

“The priority for the
federal government and UBS is to minimize potential losses and risks so that
recourse to the federal guarantee is avoided to the greatest extent possible,” the Swiss government noted.

Meanwhile, the Swiss
Federal Council recently moved
up the end date of its consultation for a planned public liquidity backstop
for systemically important banks. The decision was taken
in light of
the Credit Suisse fiasco.

Credit Suisse, an already-troubled Swiss banking giant, collapsed in March after its shares plunged to an all-time-low in the wake of the recent banking crisis in the United States.
However, Swiss authorities offered a rescue package to the lender in a rushed deal, bypassing the legislature and
angering Swiss lawmakers.