Swiss authorities and UBS sign loss protection agreement
To make the takeover of Credit Suisse by UBS possible, the Swiss federal government has provided UBS with a guarantee for any losses incurred on the realisation of Credit Suisse assets. The loss protection agreement was signed on 9 June 2023.
The guarantee will take effect only if the losses arising from the realisation of these assets exceed CHF 5 billion. It is limited to a total of CHF 9 billion. The priority for the federal government and UBS is to minimise potential losses and risks so that recourse to the federal guarantee is avoided to the greatest extent possible.
The Federal Council was informed of the loss protection agreement during its meeting on 9 June 2023.
In taking over Credit Suisse, UBS is also taking over a portfolio of assets that are considered non-core to UBS and do not fit its business and risk profile. As part of the takeover of Credit Suisse by UBS, the federal government therefore declared on 19 March that it was prepared to shoulder a portion of any losses arising from the realisation of these assets.
Article 14a of the emergency ordinance forms the basis for this. UBS has to bear the first CHF 5 billion of any losses realised when winding down these Credit Suisse assets. If this amount is exceeded, the federal government will assume losses up to a maximum of CHF 9 billion. A net approach will be taken when calculating the losses, which means that any profits from the realisation of the portfolio will also be taken into account.
According to the announcement by UBS, the takeover of Credit Suisse is to be completed as early as 12 June 2023. This takeover became necessary in order to prevent a Credit Suisse bankruptcy or restructuring, which would have had serious ramifications for the Swiss economy and international financial stability. An important element of this takeover has now been finalised, with the Federal Department of Finance (FDF) and UBS signing the associated loss protection agreement on 9 June 2023.
The key terms are as follows:
- Portfolio of assets: the loss protection agreement covers a specific portfolio of Credit Suisse assets, which corresponds to approximately 3% of the combined assets of the merged bank. The portfolio includes primarily loans, derivatives, legacy assets and structured products from Credit Suisse’s Non-Core Unit. UBS will provide regular information on its new Non-Core Unit as part of its quarterly reporting.
- Covered losses: in principle, only losses actually realised are covered by the guarantee. Any profits as well as any losses are included in the calculation. Only after the final realisation of the assets can UBS draw the guarantee for any losses exceeding CHF 5 billion from the federal government (up to a maximum of CHF 14 bn).
- Guarantee fee/costs: UBS will pay the federal government a guarantee fee consisting of an initial set-up fee of CHF 40 million, an annual maintenance fee of 0.4% of CHF 9 billion (CHF 36 mn p.a.) to cover the Confederation’s advisory costs, among other things, and an annual drawn portion fee (risk premium) of between 0% and 4% of CHF 9 billion, depending on the already realised losses and those still expected. The greater these losses, the higher the respective risk premium, which will have to be paid only in the event of the guarantee being drawn.
- Duration: the agreement will remain in place until the final realisation of the guaranteed portfolio. UBS may terminate the loss protection agreement at any time, but would thus cease to benefit from the federal loss protection.
The federal guarantee is subject to strict conditions. UBS is obliged to manage the assets in such a way that losses are minimised and realisation proceeds are maximised. The federal government has broad information and audit rights in order to verify this. UBS is required to establish an appropriate organisational structure in the form of a separate organisational unit, including the appointment of an oversight committee and a management team, and to report to the federal government on a quarterly basis. Moreover, UBS is obliged to maintain its headquarters in Switzerland in order to be eligible for a payment under the guarantee.
The federal government’s primary objective is to keep the financial and legal risks for the Confederation, and thus for taxpayers, as low as possible. The priority for both UBS and the federal government is to minimise the asset realisation losses so that recourse to the federal guarantee is avoided to the greatest extent possible.
The overall package of 19 March 2023 also included a federal default guarantee for liquidity assistance loans from the Swiss National Bank, up to a maximum of CHF 100 billion (public liquidity backstop, or PLB). As of the end of May, Credit Suisse had repaid its outstanding PLB amounts in full to the Swiss National Bank. Consequently, the Confederation has not yet incurred any losses on the corresponding guarantee, and instead generated receipts of CHF 111 million as of the end of May.